Do structural breaks in exchange rate volatility matter? Evidence from Asia-Pacific currencies

Yongyang Su, Chi Keung Lau and Mehmet Bilgin
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Yongyang Su: Hong Kong Baptist University

Iktisat Isletme ve Finans, 2011, vol. 26, issue 304, 57-78

Abstract: Using the U.S. dollar exchange rate return series of three major Asia-Pacific currencies, this paper investigates the empirical relevance of structural breaks in exchange rate volatilities. We find significant evidence of structural breaks in the unconditional variances of all three exchange rate returns, implying unstable GARCH processes for these exchange rates. Various methods of accommodating structural breaks were considered when forecasting daily exchange rate volatility using GARCH models. In sharp contrast to previous evidence from currencies of developed countries, accommodating structural breaks, however, did not improve out-of-sample forecasts of exchange rate volatility, i.e., a simple GARCH(1,1) with expanding window model performed best in forecasting exchange rate volatilities in these emerging markets

Keywords: Exchange rate return; Structural breaks; Volatility; Asia-pacific currencies (search for similar items in EconPapers)
JEL-codes: F31 G15 O53 (search for similar items in EconPapers)
Date: 2011
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