Modelling exchange rate volatility in the run-up to EMU using a Markov switching GARCH model

Arbeitspapier

The volatility of exchange rates is of high importance, because it affects decisions of market participants. The choice of the exchange rate arrangement affects the volatility of the exchange rate: higher flexibility goes ahead with increasing volatility and vice versa. We investigate the exchange rate volatility of possible initial members prior to the launch of European Monetary Union (EMU). The analyses merges two approaches, the GARCH-model (Bollerslev, 1986) and the Markov Switching Model (Hamilton, 1989). We discover a switch towards a low-volatility level in the run-up to the meeting of the EU council in Brussels in May 1998. The exact date of the switch differs depending on the particular currency, but has always been taken place between the end of 1997 and March 1998, when the convergance report was released. In contrast, and after the convergance report was published there was hardly any uncertainty left in the market.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Diskussionsbeitrag ; No. 306

Classification and Topics

• Classification: Wirtschaft ; Financial Aspects of Economic Integration ; Foreign Exchange ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
• Subject: Exchange rate volatility ; European Monetary Union ; Regime Switching GARCH

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Frömmel, Michael
• Event: Veröffentlichung
• (who): Universität Hannover, Wirtschaftswissenschaftliche Fakultät
• (where): Hannover
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/22418
• Last update: 10.03.2025, 11:41 AM CET