Working Paper

Target zones and conditional volatility: the role of realignments

Abstract: This paper examines the relationship between the conditional volatility of target zone exchange rates and realignments of the system. To investigate this question, modified jump diffusion Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and absolute value GARCH models are fit to six exchange rates of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). Time-varying jump probability and absolute value GARCH models are effective in improving the fit of jump-diffusion models on target zone data. There is some evidence that conditional volatility is higher around the periods of realignments.

Keywords: Foreign exchange rates; European Monetary System (Organization);

Status: Published in Journal of Empirical Finance, April 1999, 6(2), pp. 177-92

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1998

Number: 1994-008