Modelling long memory in exchange rate volatility

Abstract

This thesis analyzes the conditional volatility dynamics of several exchange rates by employing the multivariate GARCH approach. The main findings are: one, evidence of long-memory and persistence in volatility is detected in the individual exchange rate return series, regardless of the choice of the numeraire currency. Furthermore, some exchange rates, such as the JPY rates, apparently share the same degree of long memory in their conditional variances. In addition, by comparing the log-likelihood values, the multivariate fractionally integrated models generally outperform those models without long-memory structures in the conditional variance. Two, consistent with previous studies, such as Hsieh (1993), and Tse and Tsui (1997), the Canadian dollar, the British pound, and the Singapore dollar vis-? -vis the US dollar do not exhibit asymmetric effects in the conditional volatility. In contrast, we detect reasonably stronger evidence of asymmetric conditional volatility for these currencies when the numeraire currency is the Japanese yen. Additionally, the depreciation shocks of the Malaysian ringgit have a greater impact on future volatilities compared with the appreciation shocks of the same magnitude, and this result is robust to the choice of the numeraire currency. Furthermore, the significance and the magnitude of asymmetric effects can vary according to how the conditional variance equation is specified. Three, we find new evidence of time-varying correlations among the currencies when they are measured against the Japanese yen. For example, similar to results in Tse (2000), we do not find strong evidence of time-varying correlations between the Singapore dollar and the Malaysian ringgit when the numeraire currency is the US dollar. However, time-varying correlations between these currencies are detected when the Japanese yen is used.