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Exchange Rate Co-movements, Hedging and Volatility Spillovers in New EU Forex Markets

Listed author(s):
  • Evzen Kocenda

    ()

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic
    CESifo, Munich
    IOS, Regensburg)

  • Michala Moravcova

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)

We analyze time-varying exchange rate co-movements and volatility spillovers between the Czech koruna, the Polish zloty, the Hungarian forint and the dollar/euro from 1999 to 2016. We apply the dynamic conditional correlations (DCC) model and the Diebold Yilmaz spillover index to examine the periods prior to and during the GFC, plus during and after the EU debt crisis. We found declining conditional correlations between new EU exchange rates prior to both crises. During the GFC and the European debt crisis, the correlations reach the lowest level, and increase afterwards. Based on the DCC model results we calculate portfolio weights and hedge ratios. We show that during both crises portfolio diversification benefits increase but hedging costs rise as well. Based on the spillover index we document that during calm periods most of the volatilities are due to each currency’s own history. However, during the distress periods volatility spillovers among currencies increase substantially.

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File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5797/lang/en
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Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2017/27.

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Length: 40 pages
Date of creation: Nov 2017
Date of revision: Nov 2017
Handle: RePEc:fau:wpaper:wp2017_27
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