Bilinear quadratic ARCH and volatility spillovers in inter-war exchange rates

David Byers and David Peel

Applied Economics Letters, 1995, vol. 2, issue 7, 215-219

Abstract: We investigate the properties of floating exchange rates in the inter-war period by estimating a bilinear quadratic ARCH model that allows for non-linearity in both mean and variance. Our analysis suggests that, with one exception, spot rates exhibited non-linearity in either of, or both, mean and variance. Apart from the intrinsic interest of this result it has implications for other work on, for instance, time varying risk premia which are assumed to depend on the conditional variance of forecast errors (ARCH-M models). Our analysis of the inter-war period suggests that such models are misspecified, which may explain the failure to find evidence of significant risk premia.

Date: 1995
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DOI: 10.1080/135048595357294

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