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Volatility Transmission in Emerging European Foreign Exchange Markets

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  • Evzen Kocenda

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  • Vit Bubak
  • Filip Zikes

Abstract

This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold-Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp1020.

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Length: pages
Date of creation: 01 Jul 2011
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Handle: RePEc:wdi:papers:2011-1020

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Keywords: Foreign exchange markets; Volatility; Spillovers; Intraday data; Nonlinear dynamics; European emerging markets;

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Cited by:
  1. Égert, Balázs & Kočenda, Evžen, 2014. "The impact of macro news and central bank communication on emerging European forex markets," Economic Systems, Elsevier, Elsevier, vol. 38(1), pages 73-88.
  2. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers, Brandeis University, Department of Economics and International Businesss School 49, Brandeis University, Department of Economics and International Businesss School.
  3. Jozef Barunik & Evzen Kocenda & Lukas Vacha, 2013. "Asymmetric connectedness of stocks: How does bad and good volatility spill over the U.S. stock market?," Papers 1308.1221, arXiv.org, revised Jul 2014.
  4. Aboura, Sofiane & Chevallier, Julien, 2014. "Volatility returns with vengeance: Financial markets vs. commodities," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/13359, Paris Dauphine University.
  5. Guglielmo Maria Caporale & John Hunter & Faek Menla Ali, 2013. "On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010," CESifo Working Paper Series 4189, CESifo Group Munich.
  6. Caraiani, Petre, 2012. "Characterizing emerging European stock markets through complex networks: From local properties to self-similar characteristics," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 391(13), pages 3629-3637.
  7. Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Jan Bruha & Tomas Holub & Eva Hromadkova & David Kocourek & Lubos Komarek & Zlatuse Komarkova & Kamila Kulhava & Petr Kral & Ivana Kubicova & Ji, 2013. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2013," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, Czech National Bank, Research Department, number as13 edited by Jakub Mateju & Kamila Kulhava, August.
  8. Todorova, Neda & Worthington, Andrew & Souček, Michael, 2014. "Realized volatility spillovers in the non-ferrous metal futures market," Resources Policy, Elsevier, Elsevier, vol. 39(C), pages 21-31.
  9. A. Khalifa & S. Hammoudeh & E. Otranto & S. Ramchander, 2012. "Volatility Transmission across Currency, Commodity and Equity Markets under Multi-Chain Regime Switching: Implications for Hedging and Portfolio Allocation," Working Paper CRENoS 201214, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  10. Michał Adam, 2013. "Spillovers and contagion in the sovereign CDS market," Bank i Kredyt, National Bank of Poland, Economic Institute, National Bank of Poland, Economic Institute, vol. 44(6), pages 571-604.
  11. Reboredo, Juan C., 2014. "Volatility spillovers between the oil market and the European Union carbon emission market," Economic Modelling, Elsevier, Elsevier, vol. 36(C), pages 229-234.
  12. Dimitrios P. Louzis, 2013. "Measuring return and volatility spillovers in euro area financial markets," Working Papers, Bank of Greece 154, Bank of Greece.
  13. Nikolaos Antonakakis & Max Breitenlechner & Johann Scharler, 2014. "How Strongly are Business Cycles and Financial Cycles Linked in the G7 Countries?," Working Papers, Faculty of Economics and Statistics, University of Innsbruck 2014-07, Faculty of Economics and Statistics, University of Innsbruck.
  14. Souček, Michael & Todorova, Neda, 2014. "Realized volatility transmission: The role of jumps and leverage effects," Economics Letters, Elsevier, Elsevier, vol. 122(2), pages 111-115.
  15. Tomas Adam & Sona Benecka, 2013. "Financial Stress Spillover and Financial Linkages between the Euro Area and the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 63(1), pages 46-64, March.
  16. Julien Chevallier & Florian Ielpo, 2013. "Volatility spillovers in commodity markets," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 20(13), pages 1211-1227, September.
  17. Pozo, Veronica F. & Schroeder, Ted C., 2012. "Price and Volatility Spillover between Livestock and Related Commodity Markets," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124798, Agricultural and Applied Economics Association.
  18. Souček, Michael & Todorova, Neda, 2013. "Realized volatility transmission between crude oil and equity futures markets: A multivariate HAR approach," Energy Economics, Elsevier, Elsevier, vol. 40(C), pages 586-597.

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