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Change in unconditional foreign exchange rate volatility: an analysis of the GBP and USD price of the Euro from 2002 to 2003

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  • Richard Heaney
  • Kerry Pattenden

Abstract

Unconditional foreign exchange rate variance is generally assumed to be constant in analysis of foreign exchange rates. It is noted that there is evidence of a change in unconditional foreign exchange rate variance during the two-year period surrounding the Iraq war, January 2002 to December 2003, for the GBP price of the Euro, although not for the USD price of the Euro. This has implications for the indiscriminate use of models that assume constant unconditional variance, such as the GARCH family of models, in the analysis of foreign exchange rates.

Suggested Citation

  • Richard Heaney & Kerry Pattenden, 2005. "Change in unconditional foreign exchange rate volatility: an analysis of the GBP and USD price of the Euro from 2002 to 2003," Applied Economics Letters, Taylor & Francis Journals, vol. 12(15), pages 929-932.
  • Handle: RePEc:taf:apeclt:v:12:y:2005:i:15:p:929-932
    DOI: 10.1080/13504850500378189
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    References listed on IDEAS

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    1. Elena Andreou & Eric Ghysels, 2002. "Detecting multiple breaks in financial market volatility dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 579-600.
    2. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," American Economic Review, American Economic Association, vol. 93(1), pages 38-62, March.
    3. Wouter J. den Haan & Andrew T. Levin, 2000. "Robust Covariance Matrix Estimation with Data-Dependent VAR Prewhitening Order," NBER Technical Working Papers 0255, National Bureau of Economic Research, Inc.
    4. Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, vol. 53(1), pages 219-265, February.
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    Cited by:

    1. Chortareas, Georgios & Jiang, Ying & Nankervis, John. C., 2011. "Forecasting exchange rate volatility using high-frequency data: Is the euro different?," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1089-1107, October.

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