Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322304 
Year of Publication: 
2025
Series/Report no.: 
ADB Economics Working Paper Series No. 768
Publisher: 
Asian Development Bank (ADB), Manila
Abstract: 
Foreign exchange (FX) trading volume is a key factor in exchange rate volatility. Given the important role of volatility in economic growth and stability, this paper investigates the dynamic nature of exchange trading volume on exchange rate volatility using hourly high-frequency data. The estimation results from ordinary least squares, fixed effects and the general autoregressive conditional heteroskedasticity model point to a significant impact of third-party foreign exchange trade volumes on the FX volatilities of original currency pairs. The United States dollar (USD), as the dominant currency, exerts sizeable effect through this third-party channel and the magnitude of the foreign exchange trading volume turns out to be a crucial factor to this effect. However, third-party currency pairs without USD linkages also exert non-negligible impact, calling for renewed attention to the effectiveness of regional financial cooperation in mitigating exchange rate volatility as compared with major foreign exchange trading partners, not only through direct transaction mechanisms but through third party currency channels.
Subjects: 
FX volatility
third party channel
GARCH model
JEL: 
F31
G15
G18
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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