Transitory and permanent components of exchange rate volatility: Further evidence from causality tests

Amalia Morales-Zumaquero and Simon Sosvilla-Rivero
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Amalia Morales-Zumaquero: Department of Economic Theory and Economic History, Universidad de Málaga, Málaga. Spain.

Revista de Economía y Finanzas (REyF), 2025, vol. 3, issue 7, 1-20

Abstract: We present new evidence on the volatility behaviour of major exchange rates, focusing on their permanent (long-run) and transitory (short-run) components. To achieve this, we conduct a causality analysis to explore their statistical relationship and identify their mutual influences. Our findings indicate that shocks to economic fundamentals (which correspond to the permanent volatility component) and market sentiment (associated with the transitory volatility component) reinforce one another, transmitting and intensifying tensions on a global scale, thus creating a complex and tightly interconnected network.

Keywords: Conditional variance; Component model; Causality analysis; Exchange rates (search for similar items in EconPapers)
JEL-codes: C32 F33 G12 G13 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:cud:journ2:v:3:y:2025:i:7:p:1-20

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