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Exchange rate volatility and volatility asymmetries: an application to finding a natural dollar currency

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Abstract:

Based on six daily spot nominal exchange rate returns denominated in the US dollar, viz-à-viz UK Pound, Japanese Yen, Swiss Franc, Canadian dollar, Australian dollar and Singapore dollar, this paper tries to find a natural Dollar currency by comparing the linear/nonlinear dynamics in the conditional variance of these bilateral exchange rate returns (time varying volatility vs. asymmetries). The characteristics of the unconditional distribution of the FX returns justified the use of the GARCH class of models of conditional volatility. Strong time varying symmetric effects are apparent in all the series examined, especially in the Australian dollar. Further asymmetric effects in unexpected appreciations and depreciations of currencies are examined based on the GJR model, the ST GARCH model and the ANST-GARCH model (which encompasses several asymmetric models). The estimates of asymmetric models show weak evidence of asymmetries in most of the currencies, except in the Japanese Yen and UK Pound. Further findings show that the Japanese Yen is a non-natural Dollar country. However, there may possibly exist some mild deterministic asymmetric effect in the UK Pound. Based on the symmetric GARCH model, a trader/investor may consider Australian dollar as the relatively most ‘likable' currency, i.e. relatively the least volatile currency and relatively the most synchronized with the US dollar.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500368672

Affiliations: 1: Department of Applied Economics, Faculty of Economics and Administration, University of Malaya, Lembah Pantai, Kuala Lumpur 50603, Malaysia 2: Department of Econometrics, Monash University, Clayton Campus, Australia

Publication date: February 20, 2006

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