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Global Volatility and Forex Returns in East Asia

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  • Sanjay Kalra

Abstract

During 2001-07, increases in mature market volatility were associated with declines in forex returns for East Asian countries, consistent with an overall "flight to safety" effect. Estimates from GARCH models suggest that a 5 percentage point increase in mature market equity volatility generated an exchange rate depreciation of up to ½ percent. This sensitivity rose during the latter period in the sample, suggesting greater integration of Asian financial markets with global markets. Unconditional standard deviations estimated from these models also provide operational measures of "long-term" and "excess" volatility in forex markets. Long-run forex volatility declined as Asian economies settled down with generally stronger fundamentals in the post-crisis period to more flexible regimes along with a generally lower level of mature market volatility.

Suggested Citation

  • Sanjay Kalra, 2008. "Global Volatility and Forex Returns in East Asia," IMF Working Papers 08/208, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/208
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    References listed on IDEAS

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    1. John Cairns & Corrinne Ho & Robert McCauley, 2007. "Exchange rates and global volatility: implications for Asia-Pacific currencies," BIS Quarterly Review, Bank for International Settlements, March.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    3. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2006. "Volatility and Correlation Forecasting," Handbook of Economic Forecasting, Elsevier.
    4. Corrinne Ho & Guonan Ma & Robert N McCauley, 2005. "Trading Asian currencies," BIS Quarterly Review, Bank for International Settlements, March.
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    Cited by:

    1. Xiaojing Zhang & Tao Sun, 2009. "Spillovers of the U.S. Subprime Financial Turmoil to Mainland China and Hong Kong SAR; Evidence from Stock Markets," IMF Working Papers 09/166, International Monetary Fund.

    More about this item

    Keywords

    East Asia; Exchange rates; Economic models; Financial stability; Financial crisis; Foreign exchange; Forex returns; GARCH models; volatility; exchange rate; standard deviation; statistics; heteroscedasticity;

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