Cross-time-frequency analysis of volatility linkages in global currency markets: an extended framework

Abstract

This research aims to detect cross-border volatility linkages among various currencies within the foreign exchange market with respect to different sampling frequencies. Eleven currency pairs are included in the sample, which covers a period from 2009 to 2020. Volatility linkages among these selected exchange rates were tested by utilizing a multivariate VAR-BEKK-GARCH model. Results indicate that volatility linkages among currencies sampled are far stronger in higher frequency terms. Strikingly, the results denote that the major currencies do not play a strong leading role in volatility transmission. This finding is more apparent when daily and intraday results are compared.

Modelling of Returns and Volatility Co-movements of Central European Currencies

“…Elements of matrix A provide us with information about "direct" shock spillovers (the conditional variance in individual market reacts to its own lagged shocks and/or lagged shocks in other markets) and "indirect" shock spillovers (the conditional variance in individual market responds to any combination of the lagged shocks cross-terms). Matrix B enables to capture the "direct" volatility spillovers (the conditional variance in individual market responds to its own lagged volatility and/or to lagged volatility in the other markets) and "indirect" spillovers (the conditional variance in individual market responds to any lagged covariance) 3 . Model specification (2) needs estimation of…”

“…2 As pointed out by e.g., [11], [24], since the second and the third term of the right-hand-side in equation ( 2) are expressed in quadratic forms, the positive definiteness of the matrix t H is ensured, so there are no additional constraints for parameter matrices A and B. 3 For a more detailed information about interpretation (as well as about some limitations) of the estimated parameters, see e.g. [2], [11], [28].…”

“…They proved significant co-movements of returns as well as volatility linkages between various foreign exchange markets. Baklaci and Yelkenci [3] provided the investigation of volatility spillovers in global currency markets utilizing the multivariate VAR-BEKK-GARCH model.…”