Empirical modeling of the DEM/USD and DEM/JPY foreign exchange rate: Structural shifts in GARCH-models and their implications

Helmut Herwartz and Hans-Eggert Reimers

No 2001,83, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: We analyze daily changes of two log foreign exchange (FX) rates involving the Deutsche Mark (DEM) for the period 1975 - 1998, namely FX-rates measured against the US dollar (USD) and the Japanese yen (JPY). Ta account for volatility e1ustering we fit a GARCH(l,l)-model with leptokurtic innovations. Its parameters are not stable over the sample period and two separate variance regimes are selected for both exchange rate series. The identified points of structural change are close to a change of the monetary policies in the US and Japan, the latter of which is followed by a long period of decreasing asset prices. Having identified subperiods of homogeneous volatility dynamics we concentrate on stylized facts to distinguish these volatility regimes. The bottom level of estimated volatility turns out be considerably higher during the second part of the sample period for both exchange rates. A similar result holds for the average level of volatility and for implied volatility of heavily traded at the money options.

Keywords: GARCH; Foreign exchange market volatility; Structural stability (search for similar items in EconPapers)
JEL-codes: C22 E44 F31 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (5)

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Journal Article: Empirical modelling of the DEM/USD and DEM/JPY foreign exchange rate: Structural shifts in GARCH‐models and their implications (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb373:200183

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