Exchange rate volatility and regime change: A Visegrad comparison

Abstract

Abstract:We analyze exchange rate volatility in the Visegrad Four countries in the course of their abandoning tight regimes for more flexible ones. We account for path dependence, asymmetric shocks, movements in interest rates, and allow for generalized error distribution. The overall findings are that volatility path dependence has a limited effect on exchange rate developments and introduction of floating regimes tends to increase exchange rate volatility. During the period of flexible regimes volatility was to a large extent driven by surprises. Degree of persistence in exchange rate volatility is high, differs with respect to currency, but stays at a similar level under the floating regime. Asymmetric news effect tends to decrease volatility under the float. Interest differential contemporaneously impacts exchange rate volatility under either regime, while the interest differential intertemporal effect is not found. Accordingly we draw policy implications.

The impact of macro news and central bank communication on emerging European forex markets

“…1 What is the empirical evidence for the CEE region? Exchange rates are known to be volatile in emerging markets (Bleaney and Francisco, 2007), including those in the CEE region (Kočenda and Valachy, 2006). However, they are much less explored than those of the developed markets and one of the main reasons for this is the lack of data (Cavusoglu, 2010).…”

Survey of Volatility and Spillovers on Financial Markets

“…Second, the CEE stocks can then be considered by hedge funds and institutional investors as a separate "asset class" as compared to stocks in Western markets. Kočenda and Valachy (2006) analyse exchange rate volatility in the four Visegrad countries, i.e. the Czech Republic, Hungary, Poland, and Slovakia during the period in which they were abandoning tight foreign exchange regimes in favour of more flexible ones.…”

“…Under the DIT nominal exchange rates are likely to exhibit increasing volatility because of less importance related to exchange rate stability and rising pressure on domestic inflation (Orlowski, 2005). Other sources of exchange rate volatility are the increasing openness of the economy and instabilities related to the balance of payments (Kočenda and Valachy, 2006). Finally, degree of volatility might differ with tighter versus looser foreign exchange regimes as well as theoretically reflect deviation from the IRP condition.…”

“…Bilson (1999) shows that the volatility of exchange rates is related to the annualized inflation differential (i t -i * t ). Kočenda and Valachy (2006) Empirical testing of the exchange rate volatility is done by employing the augmented threshold GARCH-in-mean (TGARCH-M) model: (5) where Δs t is the difference of the log exchange rate. The extension includes a conditional variance (σ 2 t ) in the mean equation to analyse the process with a path-dependent rather than the zero-conditional mean.…”

EMU-Related News and Financial Markets in the Czech Republic, Hungary, and Poland

“…For the exchange rate arrangements of the CEEC-3, see IMF (2006). For a more thorough treatment of exchange rate policy in the CEEC-3 (and Slovakia), see Kočenda and Valachy (2006). 4 This exchange rate regime was replaced by a free float on 26 February 2008.…”