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Exchange rate volatility and volatility asymmetries: an application to finding a natural dollar currency

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  • Kian Teng Kwek
  • Kuan Nee Koay
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    Abstract

    Based on six daily spot nominal exchange rate returns denominated in the US dollar, viz-a-viz UK Pound, Japanese Yen, Swiss Franc, Canadian dollar, Australian dollar and Singapore dollar, this paper tries to find a natural Dollar currency by comparing the linear/nonlinear dynamics in the conditional variance of these bilateral exchange rate returns (time varying volatility vs. asymmetries). The characteristics of the unconditional distribution of the FX returns justified the use of the GARCH class of models of conditional volatility. Strong time varying symmetric effects are apparent in all the series examined, especially in the Australian dollar. Further asymmetric effects in unexpected appreciations and depreciations of currencies are examined based on the GJR model, the ST GARCH model and the ANST-GARCH model (which encompasses several asymmetric models). The estimates of asymmetric models show weak evidence of asymmetries in most of the currencies, except in the Japanese Yen and UK Pound. Further findings show that the Japanese Yen is a non-natural Dollar country. However, there may possibly exist some mild deterministic asymmetric effect in the UK Pound. Based on the symmetric GARCH model, a trader/investor may consider Australian dollar as the relatively most 'likable' currency, i.e. relatively the least volatile currency and relatively the most synchronized with the US dollar.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500368672
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 38 (2006)
    Issue (Month): 3 ()
    Pages: 307-323

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    Handle: RePEc:taf:applec:v:38:y:2006:i:3:p:307-323

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    1. GHYSELS, Eric & HARVEY, Andrew & RENAULT, Eric, 1995. "Stochastic Volatility," CORE Discussion Papers 1995069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    8. Ronald McKinnon & Gunther Schnabl, 2002. "Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role," Working Papers 02010, Stanford University, Department of Economics.
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    11. repec:fth:sydnec:217 is not listed on IDEAS
    12. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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    Cited by:
    1. Nikolaos Sariannidis, 2011. "Stock, Energy and Currency Effects on the Asymmetric Wheat Market," International Advances in Economic Research, Springer, vol. 17(2), pages 181-192, May.

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