Exchange return co-movements and volatility spillovers before and after the introduction of Euro

Antonakakis, Nikolaos (2012): Exchange return co-movements and volatility spillovers before and after the introduction of Euro.

Abstract

This paper examines co-movements and volatility spillovers in the returns of the euro, the British pound, the Swiss franc and the Japanese yen vis-a-vis the US dollar before and after the introduction of the euro. Based on dynamic correlations, variance decompositions, generalized VAR analysis, and a newly introduced spillover index, the results suggest significant co-movements and volatility spillovers across the four exchange returns, but their extend is, on average, lower in the latter period. Return co-movements and volatility spillovers show large variability though, and are positively associated with extreme economic episodes and, to a lower extend, with appreciations of the US dollar. Moreover, the euro (Deutsche mark) is the dominant currency in volatility transmission with a net volatility spillover of 8\% (15\%) to all other markets, while the British pound is the dominant net receiver of volatility with a net volatility spillover of -11\% (-13\%), in the post- (pre-) euro period. The nature of cross-market volatility spillovers is found to be bidirectional though, with the highest volatility spillovers occurring between the European markets. The economic implications of these findings for central bank interventions, international portfolio diversification and currency risk management are then discussed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange returns co-movement; Volatility spillover; Vector autoregression; Variance decomposition; Spillover index; Multivariate GARCH
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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