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Modelling South African Currency Crises as Structural Changes in the Volatility of the Rand

  • Andrew S Duncan
  • Guangling D Liu

This study tests the theory that currency crises are associated with sudden large changes in the structure of foreign exchange market volatility. Due to increases in market uncertainty, crisis periods exhibit abnormally high levels of volatility. By studying short-term changes in volatility dynamics, it is possible to identify the start- and end-dates of crisis periods with a high degree of precision. We use the iterative cumulative sum of squares algorithm to detect multiple shifts in the volatility of rand returns between January 1994 and March 2009. Dummy variables controlling for the detected shifts in variance are incorporated in a GARCH modelling framework. The analysis indicates that previously identified crisis periods in the rand coincide with significant structural changes in market volatility.

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Paper provided by Economic Research Southern Africa in its series Working Papers with number 140.

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Date of creation: 2009
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Handle: RePEc:rza:wpaper:140
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  1. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
  2. 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 357-84, March.
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  4. Kurz, Mordecai, 1994. "On Rational Belief Equilibria," Economic Theory, Springer, vol. 4(6), pages 859-76, October.
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  6. Pagan, A.R. & Kearns, P., 1990. "Ustralian Stock Market Volatility: 1875-1987," RCER Working Papers 248, University of Rochester - Center for Economic Research (RCER).
  7. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
  8. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
  9. Tobias Knedlik, 2006. "Signaling Currency Crises in South Africa," IWH Discussion Papers 19, Halle Institute for Economic Research.
  10. Farooq Malik & Bradley Ewing & James Payne, 2005. "Measuring volatility persistence in the presence of sudden changes in the variance of Canadian stock returns," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 1037-1056, August.
  11. Tobias Knedlik & Rolf Scheufele, 2008. "Forecasting Currency Crises: Which Methods Signaled The South African Crisis Of June 2006?," South African Journal of Economics, Economic Society of South Africa, vol. 76(3), pages 367-383, 09.
  12. Jeffrey A. Frankel & Andrew K. Rose, 1994. "A Survey of Empirical Research on Nominal Exchange Rates," NBER Working Papers 4865, National Bureau of Economic Research, Inc.
  13. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  14. Bera, Anil K & Higgins, Matthew L, 1993. " ARCH Models: Properties, Estimation and Testing," Journal of Economic Surveys, Wiley Blackwell, vol. 7(4), pages 305-66, December.
  15. Malik, Farooq, 2003. "Sudden changes in variance and volatility persistence in foreign exchange markets," Journal of Multinational Financial Management, Elsevier, vol. 13(3), pages 217-230, July.
  16. Lastrapes, William D, 1989. "Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(1), pages 66-77, February.
  17. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
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