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Foreign Exchange Market Volatility in Eu Accession Countries in the Run-Up to Euro Adoption; Weathering Uncharted Waters

Author

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  • Istvan P Szekely
  • Ádám Kóbor

Abstract

The paper analyzes foreign exchange market volatility in four Central European EU accession countries in 2001-2003. By using a Markov regime-switching model, it identifies two regimes representing high- and low-volatility periods. The estimation results show not only that volatilities are different between the two regimes but also that some of the cross-correlations differ. Notably, cross-correlations increase substantially for two pairs of currencies (the Hungarian forint-Polish zloty and the Czech koruna-Slovak koruna) in the high-volatility period. The paper concludes by discussing the policy implications of these findings.

Suggested Citation

  • Istvan P Szekely & Ádám Kóbor, 2004. "Foreign Exchange Market Volatility in Eu Accession Countries in the Run-Up to Euro Adoption; Weathering Uncharted Waters," IMF Working Papers 04/16, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:04/16
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    References listed on IDEAS

    as
    1. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (US).
    2. Dueker, Michael & Neely, Christopher J., 2007. "Can Markov switching models predict excess foreign exchange returns?," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 279-296, February.
    3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    4. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
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    Citations

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    Cited by:

    1. Thomas Windberger & Jesus Crespo Cuaresma & Janette Walde, 2012. "Dirty floating and monetary independence in Central and Eastern Europe - The role of structural breaks," Working Papers 2012-21, Faculty of Economics and Statistics, University of Innsbruck.
    2. Michael Frömmel, 2010. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 2-21, February.
    3. Giannellis, Nikolaos & Papadopoulos, Athanasios P., 2011. "What causes exchange rate volatility? Evidence from selected EMU members and candidates for EMU membership countries," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 39-61, February.
    4. Mario Jovanoviæ, 2009. "Serbian foreign exchange market during 2004-2008," SEEMHN papers 19, National Bank of Serbia.
    5. Marcus Pramor & Natalia T. Tamirisa, 2006. "Common Volatility Trends in the Central and Eastern European Currencies and the Euro," IMF Working Papers 06/206, International Monetary Fund.
    6. Rupert D Worrell & Andrea M. Maechler & Srobona Mitra, 2007. "Decomposing Financial Risks and Vulnerabilities in Eastern Europe," IMF Working Papers 07/248, International Monetary Fund.
    7. Aleš Bulíø, 2005. "Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(5-6), pages 206-231, May.
    8. Morar Triandafil, Cristina & Brezeanu, Petre & Huidumac, Catalin & Morar Triandafil, Adrian, 2011. "The Drivers of the CEE Exchange Rate Volatility - Empirical Perspective in the context of the Recent Financial Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 212-229, March.
    9. Juraj Stanèík, 2007. "Determinants of Exchange-Rate Volatility: The Case of the New EU Members," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(9-10), pages 414-432, October.
    10. Bednarik, Radek, 2008. "Analýza volatility devizových kurzů vybraných ekonomik
      [The Analysis of Volatility of Selected Countries' Exchange Rates]
      ," MPRA Paper 15046, University Library of Munich, Germany.

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