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Exchange Rate Co-movements, Hedging and Volatility Spillovers in New EU Forex Markets

Evžen Kočenda and Michala Moravcova ()

No 2017/27, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: We analyze time-varying exchange rate co-movements and volatility spillovers between the Czech koruna, the Polish zloty, the Hungarian forint and the dollar/euro from 1999 to 2016. We apply the dynamic conditional correlations (DCC) model and the Diebold Yilmaz spillover index to examine the periods prior to and during the GFC, plus during and after the EU debt crisis. We found declining conditional correlations between new EU exchange rates prior to both crises. During the GFC and the European debt crisis, the correlations reach the lowest level, and increase afterwards. Based on the DCC model results we calculate portfolio weights and hedge ratios. We show that during both crises portfolio diversification benefits increase but hedging costs rise as well. Based on the spillover index we document that during calm periods most of the volatilities are due to each currency’s own history. However, during the distress periods volatility spillovers among currencies increase substantially.

Keywords: Exchange rate; New EU forex markets; volatility; DCC model; volatility spillover index; EU debt crisis; global financial crisis (search for similar items in EconPapers)
JEL-codes: C52 F31 F36 G15 P59 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2017-11, Revised 2017-11
New Economics Papers: this item is included in nep-eec and nep-rmg
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Journal Article: Exchange rate comovements, hedging and volatility spillovers on new EU forex markets (2019) Downloads
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