Where Does the Meteor Shower Come from? the Role of Stochastic Policy Coordination

32 Pages Posted: 8 Jan 2008 Last revised: 10 Aug 2010

See all articles by Takatoshi Ito

Takatoshi Ito

University of Tokyo - Faculty of Economics; National Bureau of Economic Research (NBER); Ministry of Finance, Tokyo

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Wenling Lin

Office of Comptroller of Currency

Date Written: October 1990

Abstract

The purpose of this paper is to examine the intra-daily volatility of the yen/dollar exchange rate over three different regimes from 1979 to 1988 which correspond to different degrees of international policy coordination. In each regime we test for heat wave vs. meteor shower effects. The heat wave hypothesis assumes that volatility has only country specific autocorrelations, while the meteor shower hypothesis allows volatility spillovers from one market to the next. Meteor showers can be caused by stochastic policy coordination, by gradual release of private information, or by market failures such as fads, bubbles or bandwagons. The rejection of the heat wave model over the first half of the 1980s discredits the stochastic policy coordination interpretation because there was little policy coordination among industrial countries prior to the Plaza Agreement in 1985.

Suggested Citation

Ito, Takatoshi and Engle, Robert F. and Lin, Wenling, Where Does the Meteor Shower Come from? the Role of Stochastic Policy Coordination (October 1990). NBER Working Paper No. w3504. Available at SSRN: https://ssrn.com/abstract=471504

Takatoshi Ito (Contact Author)

University of Tokyo - Faculty of Economics ( email )

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Tokyo 113-0033
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National Bureau of Economic Research (NBER) ( email )

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Ministry of Finance, Tokyo ( email )

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Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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New York University (NYU) - Department of Finance

Stern School of Business
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New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wenling Lin

Office of Comptroller of Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

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