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

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...

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Bibliographic Details
Published in:Applied economics 2006-02, Vol.38 (3), p.307-323
Main Authors: Kwek, Kian Teng, Koay, Kuan Nee
Format: Article
Language:English
Subjects:
American dollar
Applied economics
Comparative analysis
Currencies
Currency
Currency market
Dollar
Economic models
Empirical tests
Exchange rates
Financial research
Foreign exchange markets
Foreign exchange rates
GARCH models
International
International monetary economics
Stochastic models
Studies
Volatility
Yen
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Summary: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.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036840500368672