Volatility Behaviour of the Foreign Exchange Rate and Transmission Among Central and Eastern European Countries: Evidence from the EGARCH Model

Abstract

This article attempts to examine the changing nature of volatility spillovers among foreign exchange markets of select Central and Eastern European countries (CEEs-5), namely, Hungary, the Czech Republic, Croatia, Romania and Poland in the pre- and post-2007 financial crisis period. Daily data ranging from April 2000 to September 2017 are used for the purpose of analysis. In order to capture volatility transmission and its asymmetry, the multivariate Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model is utilized to catch the effect of good and bad news. The key findings of the study provide useful insights into how information is transmitted and disseminated across CEEs-5 foreign exchange markets. In particular, the estimation presents the precise measures of return spillovers and volatility spillovers. The analysis highlights that the foreign exchange markets become more independent after crises. Similarly, in such time, the volatility spillover among the foreign exchange markets decreases dramatically and financial markets have not been transmitted during the crisis period. Also, we find that positive shocks generate more volatility spillovers than negative shocks of the same magnitude. The asymmetric spillover effect is evident for price shocks originating from CEEs-5 foreign exchange markets. Further, our findings have essential portfolio management implications for international investors and policymakers.