Black and official exchange rate volatility and foreign exchange controls

Kate Phylaktis and Yiannis Kassimatis

Applied Financial Economics, 1997, vol. 7, issue 1, 15-24

Abstract: Autoregressive conditionally heteroscedastic (ARCH) and generalized ARCH (GARCH) models are applied to foreign currencies that are traded in both official and black markets using monthly rates in a group of Pacific Basin countries. It is shown that (i) in contrast to the observation of other studies using monthly rates, ARCH/GARCH processes characterize all exchange rate series in both markets; (ii) the relaxation of foreign exchange controls increased the volatility of exchange rates in official markets as implied by theoretical analysis; and (iii) the persistence of volatility is reduced when account is taken of the discrete change in policy on foreign exchange controls.

Date: 1997
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DOI: 10.1080/096031097333817

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