Empirical modeling of the DEM/USD and DEM/JPY foreign exchange rate: Structural shifts in GARCH-models and their implications
AbstractWe analyze daily changes of two log foreign exchange (FX) rates involving the Deutsche Mark (DEM) for the period 1975 - 1998, namely FX-rates measured against the US dollar (USD) and the Japanese yen (JPY). Ta account for volatility e1ustering we fit a GARCH(l,l)-model with leptokurtic innovations. Its parameters are not stable over the sample period and two separate variance regimes are selected for both exchange rate series. The identified points of structural change are close to a change of the monetary policies in the US and Japan, the latter of which is followed by a long period of decreasing asset prices. Having identified subperiods of homogeneous volatility dynamics we concentrate on stylized facts to distinguish these volatility regimes. The bottom level of estimated volatility turns out be considerably higher during the second part of the sample period for both exchange rates. A similar result holds for the average level of volatility and for implied volatility of heavily traded at the money options. --
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 Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2001,83.
Date of creation: 2001
Date of revision:
GARCH; Foreign exchange market volatility; Structural stability;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.