Asymmetric Volatility of Exchange Rate Returns Under The EMS: Some Evidence From Quantile Regression Approach for Tgarch Models

Abstract

This paper investigates the systematic impact of the European Monetary System EMS) on asymmetry in volatility of exchange rates vis-à-vis the Deutsche Mark. It seems plausible that the symmetric fluctuation band in the EMS affects asymmetric volatility and this id dominant at extreme returns. To examine the plausibility, this paper proposes quantile regression for threshold GARCH models (QRTGARCH), which allows an asymmetric reaction of conditional volatility to shocks without any rigid distributional assumptions. Further, it is well suited to precisely capture the asymmetric behaviors of conditional volatility over different levels of returns. The empirical finding suggests that the EMS seems to have some systematic effect on the asymmetry in volatility at moderate level of unpredictable returns. Especially, the estimation results of the QRTGARCH show that after the EMS conditional volatility for most of EMS currencies tends to grow more significantly in reaction to positive shock than negative shock at 0.1 quantile of returns distribution, so that as the unpredictable returns go down, the systematic effect of the EMS on asymmetry in volatility becomes more significant. Impressive as these results may be, the systematic effect can vary with levels of unpredictable returns. [F31, C22, or C51]

^*This paper was written while I was visiting at Duke University, to whom I am grateful for General hospitality. I would like to express my appreciation to Roger Koenker, Tim Bollerslev, George Tauchen, and two anonymous referees for their valuable comments or suggestions. Needless to say, I am solely responsible for any remaining errors. This paper was accomplished with Research Fund provided by Korea Research Foundation, Support for Faculty Research Abroad.

^*This paper was written while I was visiting at Duke University, to whom I am grateful for General hospitality. I would like to express my appreciation to Roger Koenker, Tim Bollerslev, George Tauchen, and two anonymous referees for their valuable comments or suggestions. Needless to say, I am solely responsible for any remaining errors. This paper was accomplished with Research Fund provided by Korea Research Foundation, Support for Faculty Research Abroad.

Notes

^*This paper was written while I was visiting at Duke University, to whom I am grateful for General hospitality. I would like to express my appreciation to Roger Koenker, Tim Bollerslev, George Tauchen, and two anonymous referees for their valuable comments or suggestions. Needless to say, I am solely responsible for any remaining errors. This paper was accomplished with Research Fund provided by Korea Research Foundation, Support for Faculty Research Abroad.