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Towards Decoding Currency Volatilities

Author

Listed:
  • D. Johannes Juttner

    (Department of Economics, Macquarie University)

  • Wayne Leung

    (Department of Economics, Macquarie University)

Abstract

This study contributes, on the basis of economic theory, to an explanation of exchange rate volatilities for a large number of currencies. We relate daily changes in GARCH(1,1) volatilities of exchange rates to the volatility changes of several of their presumed fundamental economic determinants. The use of highfrequency data limits the choice of the explanatory economic variables that can be included. The first differences of GARCH(1,1) volatilities of share and bond price indices proxy for wealth uncertainty and the latter, in addition, for interest rate variability. Likewise, first differences of the gold price volatility, as an additional determinant, are related to exchange rate volatilities of two commodity currencies in the sample. The estimates produce coefficients with the expected signs and statistical significance.

Suggested Citation

  • D. Johannes Juttner & Wayne Leung, 2004. "Towards Decoding Currency Volatilities," Research Papers 0405, Macquarie University, Department of Economics.
    • Handle: RePEc:mac:wpaper:0405
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    File URL: http://www.econ.mq.edu.au/research/2004/CurrencyVolatilities4.pdf
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    More about this item

    Keywords

    Exchange rate volatilities; volatility relationships; GARCH modelling;
    All these keywords.

    JEL classification:

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

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