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Volatility changes in drachma exchange rates

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  • Patricia Chelley-Steeley
  • Nikolaos Tsorakidis

Abstract

In January 2001 Greece joined the eurozone. The aim of this article is to examine whether an intention to join the eurozone had any impact on exchange rate volatility. We apply the Iterated Cumulative Sum of Squares (ICSS) algorithm of Inclan and Tiao (1994) to a set of Greek drachma exchange rate changes. We find evidence to suggest that the unconditional volatility of the drachma exchange rate against the dollar, British pound, yen, German mark and ECU/Euro was nonstationary, exhibiting a large number of volatility changes prior to European Monetary Union (EMU) membership. We then use a news archive service to identify the events that might have caused exchange rate volatility to shift. We find that devaluation of the drachma increased exchange rate volatility but ERM membership and a commitment to joining the eurozone led to lower volatility. Our findings therefore suggest that a strong commitment to join the eurozone may be sufficient to reduce some exchange rate volatility which has implications for countries intending to join the eurozone in the future.

Suggested Citation

  • Patricia Chelley-Steeley & Nikolaos Tsorakidis, 2009. "Volatility changes in drachma exchange rates," Applied Financial Economics, Taylor & Francis Journals, vol. 19(11), pages 905-916.
  • Handle: RePEc:taf:apfiec:v:19:y:2009:i:11:p:905-916
    DOI: 10.1080/09603100701394579
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    References listed on IDEAS

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    1. Belke, A. & Gros, D., 1998. "Evidence on the Costs of Intra-European Exchange Rate Variability," Discussion Paper 1998-14, Tilburg University, Center for Economic Research.
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    Cited by:

    1. Christopher J. Neely, 2011. "A survey of announcement effects on foreign exchange volatility and jumps," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 361-385.

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