On the Implied Foreign Exchange Rate Volatility: The Role of External Vulnerability Indicators and When They Count the Most?

21 Pages Posted: 24 Mar 2013

See all articles by Salih Fendoglu

Salih Fendoglu

Central Bank of the Republic of Turkey

Date Written: March 22, 2013

Abstract

This paper studies the effect of external vulnerability indicators on the implied foreign exchange rate volatility. Controlling for a set of domestic and external macroeconomic factors and using options-implied volatilities, the results suggest that (i) market participants expect a lower future volatility in response to a decrease in current account deficit or an increase in international reserve adequacy; (ii) when global financial conditions are on the edge (when the VIX is above a certain threshold), both external vulnerability indicators imply a stronger effect on the future expected volatility (around twice as high, on average); (iii) these effects are by-and-large stronger for emerging market economies.

Keywords: Implied Exchange Rate Volatility, Panel Regression, Threshold Estimation, External Vulnerability Indicators

JEL Classification: F31, G15

Suggested Citation

Fendoglu, Salih, On the Implied Foreign Exchange Rate Volatility: The Role of External Vulnerability Indicators and When They Count the Most? (March 22, 2013). Available at SSRN: https://ssrn.com/abstract=2237846 or http://dx.doi.org/10.2139/ssrn.2237846

Salih Fendoglu (Contact Author)

Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

HOME PAGE: http://www.salihfendoglu.net

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
71
Abstract Views
613
Rank
627,224
PlumX Metrics