Abstract
The study on volatility and asymmetry of the exchange rate by applied to the daily Won/Dollar exchange rate shows that past volatility of the exchange rate still has strong persistency at present and asymmetry effect and the leverage effect, which explain that volatility shock has an effect on the uncertainty of the exchange rate, are also existent after the free floating exchange rate system was adopted.
Highlights
A certain problem will appear when we assume circumstances on the basis of the generalized autoregressive conditional heteroskedasticity (ARCH) (GARCH) model, which presumes a symmetric reaction to shocks, in that we might underestimate negative shocks and overestimate positive shocks. Due to this kind of problem in assumption, we can use the TARCH model of Glosten, Jagannathan and Runkle [2] and the exponential GARCH (EGARCH) model of Nelson [3] which specialized in measuring asymmetric volatility of the exchange rate
Models are used to estimate the asymmetry effect and the leverage effect, which show that Won/Dollar exchange rate and volatility shocks can highly impact on the uncertainty of exchange rate and the result of assumption are as follows
In the result of assumption using the GARCH (1,1), TARCH (1,1) and EGARCH (1,1) models, all parameters were statistically significant and these models appeared to be suitable for assumption in that their conditional variance equations were all stationary on the ground that α + β was 0.989 in GARCH (1,1), α + β + (γ / 2) was 0.990 in TARCH (1,1) and β was 0.975 in EGARCH (1,1), that is, they all were close to 1
Summary
The uncertainty of the exchange rate in Korea, which has a small open economy that shows a tendency to be dependent on foreign countries, has been sharply increased due to the increase in the volatility of the exchange rate by the regime shifts such as execution of the free floating exchange rate system and foreign exchange and capital account liberalization since the currency crisis of December, 1997.Generally, the uncertainty of the exchange rate shows us how much economic behaviors are not able to perceive the directionality of the actual or future volatility of exchange rate, that is, it is a different concept from the volatility of the exchange rate itself in that it means that the more forecast errors of economic behaviors made, the higher the trends in the uncertainty of the exchange rate are shown.The uncertainty of the exchange rate has a tendency to be inconstant, rather than to be fixed in the time-varying cases, that is to say, it has a feature of not homoskedasticity but conditional heteroskedasticity, which means that past information, is able to have an impact on future movements.One of the examples of conditional heteroskedasticity is the generalized ARCH (GARCH) model of Bollerslev[1]. Due to this kind of problem in assumption, we can use the TARCH (threshold ARCH) model of Glosten, Jagannathan and Runkle [2] and the exponential GARCH (EGARCH) model of Nelson [3] which specialized in measuring asymmetric volatility of the exchange rate.
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