Persistence And Asymmetry In Exchange Rate Volatility

Abstract

Recent economic downturn in the United States and Europe has affected major currencies around the world. This paper focuses on the behavior of exchange rates over the past decade to study how volatility pattern of these exchange rates responds to any exogenous shocks. The paper focuses on persistence and asymmetry in volatility of major exchange rates due to exogenous shocks. The paper employs a univariate GARCH and an EGRACH model to test the persistence and asymmetry of exchange rate volatility using data from the past decade plus. The results show high persistence and asymmetric behavior in volatility implying that the effect of good news on exchange rates is different from the effect of bad news. The results of this paper have important implications for foreign exchange investors and will provide a better understanding of the foreign exchange market to interested observers.