Asymmetric Response in Foreign Exchange Volatility under Structural Break
AbstractThis paper considers the embedded dynamics of conditional volatility in five selected exchange rates vis-à-vis Indian Rupee. Specifically, it explores the possible asymmetric response of volatility towards good and bad news and inquires whether it is sensitive to breaks in volatility. Using a suitable GARCH family model no asymmetric response of volatility is found when structural breaks were ignored. However, once the breaks in volatility are incorporated, significant asymmetric volatility response and leverage effects could be detected in all five selected exchange rates. Leverage effects have been strong in the years following the currency crisis of 1997-98, for four out of the five exchange rates. The same phenomenon recurs during the recent recovery after the financial crisis of 2007-08. Thus, during recovery, with the shocks of crisis still in the mind of the investors, bad news tends to exert greater impact on volatility than the good ones.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 26817.
Date of creation: 17 Nov 1981
Date of revision:
Exchange rate dynamics; Structural breaks; asymmetric volatility response;
Find related papers by JEL classification:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G01 - Financial Economics - - General - - - Financial Crises
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.:
- Robert C. Feenstra & Jon D. Kendall, 1991.
"Exchange Rate Volatility and International Prices,"
NBER Working Papers
3644, National Bureau of Economic Research, Inc.
- Doroodian, K., 1999. "Does exchange rate volatility deter international trade in developing countries?," Journal of Asian Economics, Elsevier, vol. 10(3), pages 465-474.
- Granger, Clive W. J. & Huangb, Bwo-Nung & Yang, Chin-Wei, 2000.
"A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu,"
The Quarterly Review of Economics and Finance,
Elsevier, vol. 40(3), pages 337-354.
- Granger, Clive W.J. & Huang, Bwo-Nung & Yang, Chin W., 1998. "A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asia Flu," University of California at San Diego, Economics Working Paper Series qt9bk607p6, Department of Economics, UC San Diego.
- Pesaran, M. H. & Timmermann, A., 1996.
"A Recursive Modelling Approach to Predicting UK Stock Returns',"
Cambridge Working Papers in Economics
9625, Faculty of Economics, University of Cambridge.
- Pesaran, M Hashem & Timmermann, Allan, 2000. "A Recursive Modelling Approach to Predicting UK Stock Returns," Economic Journal, Royal Economic Society, vol. 110(460), pages 159-91, January.
- Allan Timmermann & M. Hashem Pesaran, 1999. "A Recursive Modelling Approach to Predicting UK Stock Returns," FMG Discussion Papers dp322, Financial Markets Group.
- O. Cushman, David, 1986. "Has exchange risk depressed international trade? The impact of third-country exchange risk," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 361-379, September.
- Hwang. S. & Pedro L. Valls Pereira, 2003.
"Small Sample Properties of GARCH Estimates and Persistence,"
Finance Lab Working Papers
flwp_48, Finance Lab, Insper Instituto de Ensino e Pesquisa.
- Soosung Hwang & Pedro L. Valls Pereira, 2006. "Small sample properties of GARCH estimates and persistence," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 473-494.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- Marianna Valentinyi-Endrész, 2004. "Structural breaks and financial risk management," MNB Working Papers 2004/11, Magyar Nemzeti Bank (the central bank of Hungary).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.