Endogenous Exchange Rate Volatility, Trading Volume and Interest Rate Differentials in a Model of Portfolio Selection

Posted: 30 Aug 1998  

May Hagiwara

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Miguel Herce

CRA International, Inc.

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

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: https://ssrn.com/abstract=120248

May Hagiwara (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States
919-966-5343 (Phone)
919-966-4986 (Fax)

Miguel Herce

CRA International, Inc. ( email )

1201 F. St. NW
Ste. 700
Washington, DC 20004
United States

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