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Uncertainty and Volatility Jumps in the Pound-Dollar Exchange Rate: Evidence from Over One Century of Data

Author

Listed:
  • Konstantinos Gkillas

    (Department of Business Administration, University of Patras, Patras, Greece)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Dimitrios Vortelinos

    () (Lincoln Business School, University of Lincoln, Lincoln, UK)

Abstract

In this paper, we analyse the role of economic uncertainty, in predicting volatility jumps in the pound-dollar exchange rate over the monthly period of 1900:02 to 2018:05, with the jumps computed using daily data over the same period. Standard linear Granger causality test fail to detect any evidence of uncertainty causing volatility jumps. But given strong evidence of nonlinearity and structural breaks between jumps and economic uncertainty, we next use a nonparametric causality-in-quantiles test, given the misspecification of the linear model. Using this data-driven robust approach, we detect overwhelming evidence of uncertainty causing volatility jumps of the dollar-pound exchange rate over its entire conditional distribution, with the strongest effect observed at the lowest considered conditional quantile. In addition, our results are, in general, found to be robust to alternative measures of uncertainty, jumps generated at daily frequency based on shorter-samples of intraday data, and across three other dollar-based exchange rates.

Suggested Citation

  • Konstantinos Gkillas & Rangan Gupta & Dimitrios Vortelinos, 2018. "Uncertainty and Volatility Jumps in the Pound-Dollar Exchange Rate: Evidence from Over One Century of Data," Working Papers 201843, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201843
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    More about this item

    Keywords

    Exchange Rates; Volatility Jumps; Uncertainty;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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