Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/121087 
Year of Publication: 
2012
Series/Report no.: 
FIW Working Paper No. 80
Publisher: 
FIW - Research Centre International Economics, Vienna
Abstract: 
This paper examines co-movements and volatility spillovers in the returns of the euro, the British pound, the Swiss franc and the Japanese yen vis-à-vis the US dollar before and after the introduction of the euro. Based on dynamic correlations, variance decompositions, generalized VAR analysis, and a newly introduced spillover index, the results suggest significant co-movements and volatility spillovers across the four exchange returns, but their extend is, on average, lower in the latter period. Return co-movements and volatility spillovers show large variability though, and are positively associated with extreme economic episodes and, to a lower extend, with appreciations of the US dollar. Moreover, the euro (Deutsche mark) is the dominant currency in volatility transmission with a net volatility spillover of 8% (15%) to all other markets, while the British pound is the dominant net receiver of volatility with a net volatility spillover of -11% (-13%), in the post- (pre-) euro period. The nature of crossmarket volatility spillovers is found to be bidirectional though, with the highest volatility spillovers occurring between the European markets. The economic implications of these findings for central bank interventions, international portfolio diversification and currency risk management are then discussed.
Subjects: 
Exchange returns co-movement
Volatility spillover
Vector autoregression
Variance decomposition
Spillover index
Multivariate GARCH
JEL: 
C32
F31
G15
Document Type: 
Working Paper

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