Common stochastic volatility trend in European exchange rates

D G McMillan

    Research output: Contribution to journalArticlepeer-review

    3 Citations (Scopus)

    Abstract

    This paper examines the nature of stochastic volatility in the deutschemark/dollar and French franc/dollar exchange rates. In particular using a multivariate random walk stochastic volatility model the study examined whether volatility in each series can be ascribed to a single common trend. Results for univariate stochastic volatility models show very high persistence in the autoregressive component of volatility supporting the model specification where volatility follows a random walk. Estimation of the multivariate model reveals a very high correlation between the volatility innovations', and suggests that they follow a common trend, in essence the volatilities are cointegrated. A multivariate model with a single volatility trend is then estimated. Finally, support for this specification is further received when estimation of a stochastic volatility model for the ratio of the two series reveals no stochastic volatility present.

    Original languageEnglish
    Pages (from-to)605-608
    Number of pages4
    JournalApplied Economics Letters
    Volume8
    Publication statusPublished - Sept 2001

    Keywords

    • FOREIGN-EXCHANGE
    • GENERALIZED ARCH
    • MARKET
    • MODELS

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