Global Volatility and Forex Returns in East Asia

Author/Editor:

Sanjay Kalra

Publication Date:

September 1, 2008

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

During 2001-07, increases in mature market volatility were associated with declines in forex returns for East Asian countries, consistent with an overall "flight to safety" effect. Estimates from GARCH models suggest that a 5 percentage point increase in mature market equity volatility generated an exchange rate depreciation of up to ½ percent. This sensitivity rose during the latter period in the sample, suggesting greater integration of Asian financial markets with global markets. Unconditional standard deviations estimated from these models also provide operational measures of "long-term" and "excess" volatility in forex markets. Long-run forex volatility declined as Asian economies settled down with generally stronger fundamentals in the post-crisis period to more flexible regimes along with a generally lower level of mature market volatility.

Series:

Working Paper No. 08/208

Subject:

English

Publication Date:

September 1, 2008

ISBN/ISSN:

9781451870664/1018-5941

Stock No:

WPIEA2008208

Format:

Paper

Pages:

31

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