Policy Uncertainty and Foreign Exchange Rates: The DCC-GARCH Model of the US / Japanese Foreign Exchange Rate

Kazutaka Kurasawa ()
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Kazutaka Kurasawa: Yamanashi Gakuin University

International Journal of Economic Sciences, 2016, vol. 5, issue 4, 1-19

Abstract: Since the breakdown of the Bretton Woods system in the 1970s, the US / Japan foreign exchange rate has been largely influenced by policy changes in the United States and Japan. This study applies the multivariate dynamic conditional correlation (DCC) ? generalized autoregressive conditional heteroscedasticity (GARCH) models to analyze the time-varying effects of policy uncertainty, measured by the economic policy uncertainty (EPU) index of Baker et al. (2013, 2016), on the US / Japan foreign exchange rate. Using the EPU index as a proxy variable, it shows that the dynamic conditional correlations between policy uncertainty and the exchange rate are not time-invariant, but even sign-changing in the sample period. The analysis also empirically examined what drives the evolution of the time-varying correlations. The driving force of the correlations is, however, mostly attributed to unknown random factors.

Keywords: policy uncertainty; foreign exchange rate; DCC model; GARCH model; time-varying correlation (search for similar items in EconPapers)
JEL-codes: C32 F31 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:sek:jijoes:v:5:y:2016:i:4:p:1-19

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