The paper proposes a new multivariate model for exchange rate volatility in a system of bilateral exchange rates, using a factor structure of exchange rates one of the common factors is always related to the numeraire currency. Time variation in the volatility is modelled using a stochastic variance approach. The interpretation of the factors provides a new way of estimating risk premia in the foreign exchange market. Empirical results show considerable volatility spillovers among the four major currencies. Risk premia show a major sign reversal for the dollar risk premium around 1978.
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Publisher Info
Paper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG in its series CEPR Financial Markets Paper with number
0041.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Tims, B. & Mahieu, R.J., 2003.
"A Range-Based Multivariate Model for Exchange Rate Volatility,"
Research Paper
ERS-2003-022-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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