Abstract:
This paper provides an investigation into the spillover effects of exchange rate returns and volatility
for developed and emerging market currencies, using data from 1997 to 2011. The results suggest
that spillovers in exchange rate returns have increased steadily over time, in moderate reaction to
economic events. In contrast, spillovers in total observed volatility (measured by squared returns)
react more strongly to economic events, and this transmission has remained at a relatively high
level since the global financial crisis. Furthermore, over the course of time, global shocks would
appear to account for a larger proportion of aggregate exchange rate volatility (and the relative
importance of domestic shocks has declined). The paper also considers whether the increase in
volatility spillover is due to sudden shocks, or whether it is due to changes in the stochastic trend
of the underlying volatility process. The results suggests that in most cases, this increase is due to
sudden shocks, however, in certain instances country-specific events may perpetuate changes to the
trend of the underlying volatility spillover.
