The Global Transmission of Volatility in the Foreign Exchange Market

Michael Melvin and Bettina Peiers Melvin
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Bettina Peiers Melvin: Arizona State University and American Express Co

The Review of Economics and Statistics, 2003, vol. 85, issue 3, 670-679

Abstract: Volatility spillovers of the DM/$ and ¥/$ exchange rate across regional markets are examined using the integrated volatility of high-frequency data. An analysis of quoting patterns reveals five distinct regions: Asia, Asia-Europe overlap, Europe, Europe-America overlap, and America. After reviewing theoretical foundations for persistence of volatility in dealership markets, regional volatility models are constructed where volatility in one region is a function of yesterday's volatility in that region ("heat-wave effect") and volatility in other regions ("meteor-shower effect"). Evidence of statistically significant effects is found for both own-region and interregional spillovers, but the economic significance of own-region spillovers indicates that heat waves are more important than meteor showers. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2003
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