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Conditional variance and fluctuation band

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  • Evžen Kočenda

Abstract

The exchange rate of the Czech koruna pegged to a currency basket is analyzed. The change of value of the basket is measured by its index. The central point of the analysis is how the change in the fluctuation band of the index affected volatility of the exchange rate. By allowing for a wider fluctuation band, the CNB let the exchange rate fluctuate more freely, thus reducing its potential nominal stability. Because of the fact that the currency basket was introduced to keep a relatively stable nominal exchange rate and to limit its volatility, a further implication is that allowing for a wider fluctuation band should lead to more pronounced movements and increased volatility of the koruna. The results of the analysis clearly indicate that allowing for a wider fluctuation band resulted in a decrease in volatility of the key currencies (DEM and USD). The other two currencies (CHF and FRF) exhibit different behavior that suggests increased volatility after the narrow fluctuation band was abolished.

Suggested Citation

  • Evžen Kočenda, 1997. "Conditional variance and fluctuation band," Prague Economic Papers, Prague University of Economics and Business, vol. 1997(4).
    • Handle: RePEc:prg:jnlpep:v:1997:y:1997:i:4:id:140
    DOI: 10.18267/j.pep.140
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