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Uncertainty and Volatility Jumps in the Pound-Dollar Exchange Rate: Evidence from Over One Century of Data

Konstantinos Gkillas (Gillas) (), Rangan Gupta and Dimitrios Vortelinos ()

No 201843, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we analyse the role of economic uncertainty, in predicting volatility jumps in the pound-dollar exchange rate over the monthly period of 1900:02 to 2018:05, with the jumps computed using daily data over the same period. Standard linear Granger causality test fail to detect any evidence of uncertainty causing volatility jumps. But given strong evidence of nonlinearity and structural breaks between jumps and economic uncertainty, we next use a nonparametric causality-in-quantiles test, given the misspecification of the linear model. Using this data-driven robust approach, we detect overwhelming evidence of uncertainty causing volatility jumps of the dollar-pound exchange rate over its entire conditional distribution, with the strongest effect observed at the lowest considered conditional quantile. In addition, our results are, in general, found to be robust to alternative measures of uncertainty, jumps generated at daily frequency based on shorter-samples of intraday data, and across three other dollar-based exchange rates.

Keywords: Exchange Rates; Volatility Jumps; Uncertainty (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018-07
New Economics Papers: this item is included in nep-ets and nep-his
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