Volatility regime-switching in European exchange rates prior to monetary unification
Several theoretical models suggest that the mere announcement of entering a currency union in the future triggers instantaneous changes in exchange-rate volatility. First, this paper develops a Markov-switching framework by which, in fact, volatility regime-switching in foreign exchange rates can be detected for all currencies in the run-up to the European Monetary Union (EMU). Second, the paper attributes the currency-specific volatility regime-switches to decisive economic, institutional and political factors prior to EMU. All in all, the empirical results suggest that for future EMU accession countries volatility regime-switching models provide a useful tool for a broad range of financial applications (e.g. for the pricing of currency options or for the construction of EMU probability calculators).
Year of publication: |
2009
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Authors: | Wilfling, Bernd |
Published in: |
Journal of International Money and Finance. - Elsevier, ISSN 0261-5606. - Vol. 28.2009, 2, p. 240-270
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Publisher: |
Elsevier |
Keywords: | EMU Exchange-rate volatility Markov-switching volatility modeling EMU uncertainty |
Saved in:
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