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Effect of exchange rate return on volatility spill-over across trading regions

  • Galagedera, Don U.A.
  • Kitamura, Yoshihiro

This paper examines the effect of realized exchange rate returns on the volatility spill-over between the euro–US dollar and US dollar–yen currency pairs across the five trading regions: Asia, Asia–Europe overlap, Europe, Europe–America overlap and America. Modelling the interaction between returns and volatility in an autoregressive five-equation system, we find evidence that depreciation of the US dollar against the yen has a greater impact on the US dollar–yen volatility spill-over than appreciation in the subprime crisis period. Appreciation and depreciation of the US dollar against the euro does not appear to have an asymmetric effect on the euro–US dollar volatility spill-over. Our results support the notion that the yen may have been preferred to the euro as a ‘safe-haven’ currency relative to the US dollar during the subprime crisis period.

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Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 24 (2012)
Issue (Month): 4 ()
Pages: 254-265

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Handle: RePEc:eee:japwor:v:24:y:2012:i:4:p:254-265
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  1. Ito, T. & Lyons, R. & Melvin, M.T., 1997. "Is There Private Information on the FX Market? The Tokyo Experiment," Papers 97-04, Economisch Institut voor het Midden en Kleinbedrijf-.
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  3. Ranaldo, Angelo & Söderlind, Paul, 2009. "Safe Haven Currencies," CEPR Discussion Papers 7249, C.E.P.R. Discussion Papers.
  4. Kentaro Iwatsubo & Yoshihiro Kitamura, 2009. "Intraday evidence of the informational efficiency of the yen/dollar exchange rate," Applied Financial Economics, Taylor & Francis Journals, vol. 19(14), pages 1103-1115.
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  7. Takatoshi Ito & Yuko Hashimoto, 2006. "Intra-Day Seasonality in Activities of the Foreign Exchange Markets: Evidence From the Electronic Broking System," NBER Working Papers 12413, National Bureau of Economic Research, Inc.
  8. Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
  9. Michael Melvin & Bettina Peiers Melvin, 2003. "The Global Transmission of Volatility in the Foreign Exchange Market," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 670-679, August.
  10. Dacorogna, Michael M. & Muller, Ulrich A. & Nagler, Robert J. & Olsen, Richard B. & Pictet, Olivier V., 1993. "A geographical model for the daily and weekly seasonal volatility in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 413-438, August.
  11. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
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