Neglected common factors in exchange rate volatility
AbstractThe 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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Bibliographic InfoPaper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-3131741.
Date of creation: 1994
Date of revision:
Publication status: Published in Journal of Empirical Finance (1994) v.1, p.279-311
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Web page: http://www.tilburguniversity.edu/
Other versions of this item:
- Mahieu, Ronald & Schotman, Peter, 1994. "Neglected common factors in exchange rate volatility," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 279-311, July.
- Ronald Mahieu & Peter Schotman, 1994. "Neglected Common Factors in Exchange Rate Volatility," CEPR Financial Markets Paper 0041, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
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- Bekaert, Geert & Hodrick, Robert J., 1993.
"On biases in the measurement of foreign exchange risk premiums,"
Journal of International Money and Finance,
Elsevier, vol. 12(2), pages 115-138, April.
- Geert Bekaert & Robert J. Hodrick, 1991. "On Biases in the Measurement of Foreign Exchange Risk Premiums," NBER Working Papers 3861, National Bureau of Economic Research, Inc.
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