Target zones and conditional volatility: the role of realignments

Christopher Neely

No 1994-008, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper examines the relationship between the conditional volatility of target zone exchange rates and realignments of the system. To investigate this question, modified jump diffusion Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and absolute value GARCH models are fit to six exchange rates of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). Time-varying jump probability and absolute value GARCH models are effective in improving the fit of jump-diffusion models on target zone data. There is some evidence that conditional volatility is higher around the periods of realignments.

Keywords: Foreign exchange rates; European Monetary System (Organization) (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (2)

Published in Journal of Empirical Finance, April 1999, 6(2), pp. 177-92

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Journal Article: Target zones and conditional volatility: The role of realignments (1999)
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DOI: 10.20955/wp.1994.008

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