Foreign Exchange Market Volatility in EU Accession Countries in the Run-Up to Euro Adoption: Weathering Uncharted Waters

Abstract:     
The paper analyzes foreign exchange market volatility in four Central European EU accession countries in 2001-2003. By using a Markov regime-switching model, it identifies two regimes representing high- and low-volatility periods. The estimation results show not only that volatilities are different between the two regimes but also that some of the cross-correlations differ. Notably, cross-correlations increase substantially for two pairs of currencies (the Hungarian forintPolish zloty and the Czech korunaSlovak koruna) in the high-volatility period. The paper concludes by discussing the policy implications of these findings.

Number of Pages in PDF File: 20

Keywords: Markov regime-switching model, foreign exchange market volatility, EU accession countries

JEL Classification: C10, G10

working papers series