Global Volatility and Forex Returns in East Asia
IMF Working Papers, September 1, 2008
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Bibliographic details
- Authors: Sanjay Kalra
- Published: September 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451870664.001
Summary findings
- 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.
- 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.
Methodology and quantitative estimates
- Model type: GARCH models used to estimate the relationship between mature market equity volatility and forex returns.
- Key quantitative finding: A 5 percentage point increase in mature market equity volatility → exchange rate depreciation of up to ½ percent.
- Temporal dynamics: Sensitivity of forex returns to mature market volatility increased in the latter part of the 2001-07 sample period.
Volatility measurement insights
- Unconditional standard deviations estimated from the GARCH models provide operational measures of:
- "long-term" volatility in forex markets, and
- "excess" volatility in forex markets.
- Observed trend: Long-run forex volatility declined in the post-crisis period as Asian economies moved to more flexible regimes and exhibited generally stronger fundamentals, coinciding with a generally lower level of mature market volatility.
Implications and interpretation
- The documented negative association between mature market volatility and East Asian forex returns is consistent with a "flight to safety" effect across the region.
- Rising sensitivity over time indicates growing financial integration between Asian and mature markets, implying that global volatility shocks may transmit more readily to Asian forex markets.
- Operational use: Unconditional standard deviations from the models can be used as pragmatic measures to track long-term and excess forex volatility.
Global Volatility and Forex Returns in East Asia — Sanjay Kalra, IMF Working Paper No. 2008/208.