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Have Exchange Rates Become More Closely Tied? Evidence from a New Multivariate GARCH Model

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  • Klaassen, F.J.G.M.

    (Tilburg University, Center for Economic Research)

Abstract

We analyze the time-dependence of exchange rate correlations using a new multivariate GARCH model. This model consists of two parts. First, we transform the exchange rate changes into their principal components and specify univariate GARCH models for all components. Second, we use the inverse of the principal components construction to transform the condi- tional component moments back into those of the exchange rate changes themselves. The model is easy to estimate, as it requires only univariate GARCH estimations. Nevertheless, it outperforms the popular constant conditional correlations and factor GARCH models. We find that the ma- jor U.S. dollar exchange rates have become more loosely instead of closely tied since the eighties.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1999-10.

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Date of creation: 1999
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Handle: RePEc:dgr:kubcen:199910

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Keywords: Correlations; multivariate models; GARCH; factor models; exchange rates;

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Cited by:
  1. 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.
  2. Morar Triandafil, Cristina & Brezeanu, Petre & Huidumac, Catalin & Morar Triandafil, Adrian, 2011. "The Drivers of the CEE Exchange Rate Volatility - Empirical Perspective in the context of the Recent Financial Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 212-229, March.
  3. Angela Black & David McMillan, 2004. "Long run trends and volatility spillovers in daily exchange rates," Applied Financial Economics, Taylor & Francis Journals, vol. 14(12), pages 895-907.
  4. Lanne, Markku & Saikkonen, Pentti, 2007. "A Multivariate Generalized Orthogonal Factor GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 61-75, January.
  5. Roy van der Weide, 2002. "GO-GARCH: a multivariate generalized orthogonal GARCH model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 549-564.
  6. Karoll Gómez Portilla & Santiago Gallón Gómez, 2007. "Distribución condicional de los retornos de la tasa de cambio colombiana: un ejercicio empírico a partir de modelos GARCH multivariados," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.

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