Abstract
This paper explores the nature of the volatility transmission mechanism of three EMS (French franc, Dutch guilder and Belgian franc) and three non-EMS (Canadian dollar, US dollar and Japanese yen) exchange rates with respect to the German mark. The methodology used is the multivariate exponential GARCH model, which is capable of capturing asymmetries in the volatility transmission mechanism. The results pointed to significant volatility spillovers among markets for all rates except the yen, before Germany's unification. Evidence of asymmetry indicates that bad news in a particular market positively affects volatility in the next market more severely than good news does. Although absence of spillovers and asymmetry is revealed after unification for the EMS rates, the presence of asymmetry and persistence in volatility for the non-EMS rates is striking.
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