Non-linear modelling of daily exchange rate returns, volatility, and 'news' in a small developing economy

Abstract

This paper models daily returns, volatility, and ‘news’ in the parallel foreign exchange market of a small developing economy, namely the Dominican Republic, during the period 1989–2001. The research adopts a non-linear specification that encompasses several members of the GARCH family. A leftward tilted news impact reveals that positive shocks (depreciations) have a higher impact than negative ones (appreciations) on the volatility of exchange rate returns. This result has significant implications for policymakers. For instance, it could help in the assessment of the potential effect of central bank interventions in the foreign exchange rate market.