Endogenous Exchange Rate Volatility, Trading Volume and Interest Rate Differentials in a Model of Portfolio Selection
May Hagiwara
University of North Carolina (UNC) at Chapel Hill - Department of Economics
Miguel Herce
CRA International, Inc.
Review of International Economics
Abstract:
This paper considers a portfolio model of exchange rate determination and focuses on endogenous sources of exchange rate volatility. We show that, in addition to volatility transmitted by conditionally heteroskedastic interest rates, the larger the serial correlation in interest rates the stronger the effect of interest rate differentials on exchange rate volatility. These features are supported by the data. We also look at the volume-volatility relationship implied by the model.
JEL Classification: F31, G11, G12
Accepted Paper Series
Suggested Citation
Hagiwara, May and Herce, Miguel, Endogenous Exchange Rate Volatility, Trading Volume and Interest Rate Differentials in a Model of Portfolio Selection. Review of International Economics. Available at SSRN: http://ssrn.com/abstract=120248
