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The Global Transmission of Volatility in the Foreign Exchange Market

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Author Info
Michael Melvin (Arizona State University)
Bettina Peiers Melvin (Arizona State University and American Express Co)

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Abstract

Volatility spillovers of the DM/$ and ¥/$ exchange rate across regional markets are examined using the integrated volatility of high-frequency data. An analysis of quoting patterns reveals five distinct regions: Asia, Asia-Europe overlap, Europe, Europe-America overlap, and America. After reviewing theoretical foundations for persistence of volatility in dealership markets, regional volatility models are constructed where volatility in one region is a function of yesterday's volatility in that region ("heat-wave effect") and volatility in other regions ("meteor-shower effect"). Evidence of statistically significant effects is found for both own-region and interregional spillovers, but the economic significance of own-region spillovers indicates that heat waves are more important than meteor showers. Copyright (c) 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/003465303322369803
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Publisher Info
Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 85 (2003)
Issue (Month): 3 (03)
Pages: 670-679
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Handle: RePEc:tpr:restat:v:85:y:2003:i:3:p:670-679

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  1. Kentaro Iwatsubo & Yoshihiro Kitamura, 2008. "Intraday Evidence of the Informational Efficiency of the Yen/Dollar Exchange Rate," Discussion Papers 0801, Graduate School of Economics, Kobe University. [Downloadable!]
  2. John Cotter & Simon Stevenson, 2006. "Multivariate Modeling of Daily REIT Volatility," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 305-325, May. [Downloadable!] (restricted)
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  3. Chris D'Souza, 2007. "Where Does Price Discovery Occur in FX Markets?," Working Papers 07-52, Bank of Canada. [Downloadable!]
  4. Marcus Pramor & Natalia T. Tamirisa, 2006. "Common Volatility Trends in the Central and Eastern European Currencies and the Euro," IMF Working Papers 06/206, International Monetary Fund. [Downloadable!]
  5. Fang Cai & Edward Howorka & Jon Wongswan, 2006. "Transmission of volatility and trading activity in the global interdealer foreign exchange market: evidence from electronic broking services (EBS) data," International Finance Discussion Papers 863, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Vinay Datar & Raymond So & Yiuman Tse, 2008. "Liquidity commonality and spillover in the US and Japanese markets: an intraday analysis using exchange-traded funds," Review of Quantitative Finance and Accounting, Springer, vol. 31(4), pages 379-393, November. [Downloadable!] (restricted)
  7. Yue Fang, 2000. "When Should Time be Continuous? Volatility Modeling and Estimation of High-Frequency Data," Econometric Society World Congress 2000 Contributed Papers 0843, Econometric Society. [Downloadable!]
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