Do Structural Breaks in Exchange Rate Volatility Matter?: Evidence from Asia-Pacific Currencies

Yongyang Su, Chi Keung Marco Lau, Mehmet Huseyin Bilgin

Research output: Contribution to journalArticle

Abstract

Using the U.S. dollar exchange rate return series of three major Asia-Pacific currencies, this paper investigates the empirical relevance of structural breaks in exchange rate volatilities. We find significant evidence of structural breaks in the unconditional variances of all three exchange rate returns, implying unstable GARCH processes for these exchange rates. Various methods of accommodating structural breaks were considered when forecasting daily exchange rate volatility using GARCH models. In sharp contrast to previous evidence from currencies of developed countries, accommodating structural breaks, however, did not improve out-of-sample forecasts of exchange rate volatility, i.e., a simple GARCH(1,1) with expanding window model performed best in forecasting exchange rate volatilities in these emerging markets.
Translated title of the contributionDo Structural Breaks in Exchange Rate Volatility Matter?: Evidence from Asia-Pacific Currencies
LanguageTurkish
Journalİktisat İşletme ve Finans
Volume26
Issue number304
DOIs
Publication statusPublished - 1 Jul 2011
Externally publishedYes

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Asia-Pacific
Structural breaks
Exchange rate volatility
Currency
Exchange rate returns
Generalized autoregressive conditional heteroscedasticity
GARCH process
Out-of-sample forecasting
Emerging markets
Exchange rates
GARCH model
Developed countries

Cite this

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title = "D{\"o}viz kuru oynaklığında yapısal kırılmalar {\"o}nemli midir?: Asya-Pasifik d{\"o}viz kurlarına ilişkin bulgular",
abstract = "Using the U.S. dollar exchange rate return series of three major Asia-Pacific currencies, this paper investigates the empirical relevance of structural breaks in exchange rate volatilities. We find significant evidence of structural breaks in the unconditional variances of all three exchange rate returns, implying unstable GARCH processes for these exchange rates. Various methods of accommodating structural breaks were considered when forecasting daily exchange rate volatility using GARCH models. In sharp contrast to previous evidence from currencies of developed countries, accommodating structural breaks, however, did not improve out-of-sample forecasts of exchange rate volatility, i.e., a simple GARCH(1,1) with expanding window model performed best in forecasting exchange rate volatilities in these emerging markets.",
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Döviz kuru oynaklığında yapısal kırılmalar önemli midir? Asya-Pasifik döviz kurlarına ilişkin bulgular. / Su, Yongyang; Lau, Chi Keung Marco; Bilgin, Mehmet Huseyin.

In: İktisat İşletme ve Finans, Vol. 26, No. 304, 01.07.2011.

Research output: Contribution to journalArticle

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