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Bilinear quadratic ARCH and volatility spillovers in inter-war exchange rates

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  • J. D. Byers
  • D. A. Peel

Abstract

We investigate the properties of floating exchange rates in the inter-war period by estimating a bilinear quadratic ARCH model that allows for non-linearity in both mean and variance. Our analysis suggests that, with one exception, spot rates exhibited non-linearity in either of, or both, mean and variance. Apart from the intrinsic interest of this result it has implications for other work on, for instance, time varying risk premia which are assumed to depend on the conditional variance of forecast errors (ARCH-M models). Our analysis of the inter-war period suggests that such models are misspecified, which may explain the failure to find evidence of significant risk premia.

Suggested Citation

  • J. D. Byers & D. A. Peel, 1995. "Bilinear quadratic ARCH and volatility spillovers in inter-war exchange rates," Applied Economics Letters, Taylor & Francis Journals, vol. 2(7), pages 215-219.
    • Handle: RePEc:taf:apeclt:v:2:y:1995:i:7:p:215-219
    DOI: 10.1080/135048595357294
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    References listed on IDEAS

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    1. Enrique Sentana, 1995. "Quadratic ARCH Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 639-661.
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    Cited by:

    1. Roberto Leon-Gonzalez & Fuyu Yang, 2017. "Bayesian inference and forecasting in the stationary bilinear model," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 46(20), pages 10327-10347, October.
    2. David G. McMillan & Isabel Ruiz, 2009. "Volatility dynamics in three euro exchange rates: correlations, spillovers and commonality," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 1(1), pages 64-74.
    3. David McMillan & Isabel Ruiz & Alan Speight, 2010. "Correlations and spillovers among three euro rates: evidence using realised variance," The European Journal of Finance, Taylor & Francis Journals, vol. 16(8), pages 753-767.
    4. McMillan, David G. & Speight, Alan E.H., 2010. "Return and volatility spillovers in three euro exchange rates," Journal of Economics and Business, Elsevier, vol. 62(2), pages 79-93, March.
    5. Daniela Hristova, 2004. "Maximum Likelihood Estimation of a Unit Root Bilinear Model with an Application to Prices," Computing in Economics and Finance 2004 47, Society for Computational Economics.
    6. Hristova Daniela, 2005. "Maximum Likelihood Estimation of a Unit Root Bilinear Model with an Application to Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-15, March.

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