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Towards Decoding Currency Volatilities

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  • D. Johannes Juttner

    ()
    (Department of Economics, Macquarie University)

  • Wayne Leung

    (Department of Economics, Macquarie University)

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    Abstract

    This study contributes, on the basis of economic theory, to an explanation of exchange rate volatilities for a large number of currencies. We relate daily changes in GARCH(1,1) volatilities of exchange rates to the volatility changes of several of their presumed fundamental economic determinants. The use of highfrequency data limits the choice of the explanatory economic variables that can be included. The first differences of GARCH(1,1) volatilities of share and bond price indices proxy for wealth uncertainty and the latter, in addition, for interest rate variability. Likewise, first differences of the gold price volatility, as an additional determinant, are related to exchange rate volatilities of two commodity currencies in the sample. The estimates produce coefficients with the expected signs and statistical significance.

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    File URL: http://www.econ.mq.edu.au/research/2004/CurrencyVolatilities4.pdf
    File Function: First Version, 2004
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    Bibliographic Info

    Paper provided by Macquarie University, Department of Economics in its series Research Papers with number 0405.

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    Length: 26 pages.
    Date of creation: Aug 2004
    Date of revision:
    Handle: RePEc:mac:wpaper:0405

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    Web page: http://www.econ.mq.edu.au/
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    Related research

    Keywords: Exchange rate volatilities; volatility relationships; GARCH modelling;

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