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Title:Modelling exchange rate volatility in the run-up to EMU using a Markov switching GARCH model PDF Logo
Authors:Frömmel, Michael
Issue Date:2004
Series/Report no.:Diskussionspapiere des Fachbereichs Wirtschaftswissenschaften, Universität Hannover 306
Abstract: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.
Subjects:Exchange rate volatility
European Monetary Union
Regime Switching GARCH
JEL:F36
F31
E42
Document Type:Working Paper
Appears in Collections:Diskussionspapiere, Wirtschaftswissenschaftliche Fakultät, Universität Hannover

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