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How Sensitive is Volatility to Exchange Rate Regimes?

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  • Viviana Fernández

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Abstract

It is usually conjectured that the nominal exchange rate should be more volatile under a free float than under a dirty float regime. This paper examines this issue for the Chilean economy. Specifically, in September 1999 the Central Bank of Chile eliminated the floating band for the nominal exchange rate, which operated since 1984, and established a free float. This lasted until the burst of the last Argentinean economic crisis in July 2001. Since then, the Central Bank has smoothed out the exchange rate path by selling US dollars and/or issuing US dollar-denominated bonds. We examine the free float period by assessing whether the increase in exchange rate volatility was as sharp as expected. We show that volatility went up, but only slightly.

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File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120030327130127.pdf
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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 135.

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Date of creation: 2002
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Handle: RePEc:edj:ceauch:135

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  1. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521770415.
  2. Bali, Turan G., 2000. "Testing the Empirical Performance of Stochastic Volatility Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 191-215, June.
  3. Sentana,E., 1995. "Quadratic Arch Models," Papers 9517, Centro de Estudios Monetarios Y Financieros-.
  4. Engle, Robert F, 1990. "Stock Volatility and the Crash of '87: Discussion," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 103-06.
  5. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  6. Harvey, Andrew & Ruiz, Esther & Shephard, Neil, 1994. "Multivariate Stochastic Variance Models," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 247-64, April.
  7. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  8. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-53, December.
  9. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
  10. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  11. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
  12. Clifford A. Ball & Walter N. Torous, 1999. "The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2339-2359, December.
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Cited by:
  1. Cecilia Maya & Karoll Gómez, 2008. "What Exactly is "Bad News" in Foreign Exchange Markets? Evidence from Latin American Markets," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(132), pages 161-183.
  2. Arturo Lorenzo-Valdés & Antonio Ruiz-Porras, 2012. "Los rendimientos cambiarios latinoamericanos y la (a)simetría de los shocks informacionales: un análisis econométrico," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 87-113, November.

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