Modelling South African Currency Crises as Structural Changes in the Volatility of the Rand
AbstractThis study tests the theory that currency crises are associated with sudden large changes in the structure of foreign exchange market volatility. Due to increases in market uncertainty, crisis periods exhibit abnormally high levels of volatility. By studying short-term changes in volatility dynamics, it is possible to identify the start- and end-dates of crisis periods with a high degree of precision. We use the iterative cumulative sum of squares algorithm to detect multiple shifts in the volatility of rand returns between January 1994 and March 2009. Dummy variables controlling for the detected shifts in variance are incorporated in a GARCH modelling framework. The analysis indicates that previously identified crisis periods in the rand coincide with significant structural changes in market volatility.
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 140.
Date of creation: 2009
Date of revision:
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Currency crisis; exchange rate; volatility; ICSS algorithm; GARCH;
Other versions of this item:
- Andrew stuart Duncan & Guangling"dave" Liu, 2009. "Modelling South African Currency Crises As Structural Changes In The Volatility Of The Rand," South African Journal of Economics, Economic Society of South Africa, vol. 77(3), pages 363-379, 09.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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