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Volatility Transmission in Emerging European Foreign Exchange Markets

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  • Evzen Kocenda
  • Vit Bubak
  • Filip Zikes

Abstract

This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold-Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty.

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  • Evzen Kocenda & Vit Bubak & Filip Zikes, 2011. "Volatility Transmission in Emerging European Foreign Exchange Markets," William Davidson Institute Working Papers Series wp1020, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2011-1020
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    More about this item

    Keywords

    Foreign exchange markets; Volatility; Spillovers; Intraday data; Nonlinear dynamics; European emerging markets;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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