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Target zones and conditional volatility: the role of realignments

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Abstract

This paper examines the relationship between the conditional volatility of target zone exchange rates and realignments of the system. To investigate this question, modified jump diffusion Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and absolute value GARCH models are fit to six exchange rates of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). Time-varying jump probability and absolute value GARCH models are effective in improving the fit of jump-diffusion models on target zone data. There is some evidence that conditional volatility is higher around the periods of realignments.

Suggested Citation

  • Christopher J. Neely, 1998. "Target zones and conditional volatility: the role of realignments," Working Papers 1994-008, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1994-008
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    1. Fred G M C Nieuwland & Willem F C Verschoor & Christian C P Wolff, 1990. "EMS Exchange Rates," CEPR Financial Markets Paper 0002, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX..
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    4. Christopher J. Neely, 1994. "Realignment of target zone exchange rate systems: what do we know?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 23-34.
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    Keywords

    Foreign exchange rates; European Monetary System (Organization);

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