Can the Traditional Asian Us Dollar Peg Exchange Rate Regime Be Extended to Include the Japanese Yen?
International Review of Financial Analysis, Vol. 17, pp. 870-885, 2007
34 Pages Posted: 4 May 2005 Last revised: 27 Dec 2010
Date Written: May 1, 2006
Using daily data for a select set of four Asian exchange rates, namely the Hong Kong dollar, the Singapore dollar, the Taiwan dollar and the Thailand baht, from October 1985 to October 2002, we apply principal components analysis and the O-GARCH model to describe the evolution and persistence in the correlations over time. We also estimate 2-, 3- and 4-variable multivariate GARCH models, without imposing the assumption of constant correlations, to investigate volatility interaction amongst the currencies. To allow for fat tails in the distributions of exchange rate changes, we use the multivariate student-t distribution in maximising our log-likelihood functions. Our results indicate the possibility of designing an Asian exchange rate system involving a number of the region's currencies.
Keywords: exchange rates, multivariate GARCH, Orthogonal GARCH, volatility
JEL Classification: C32, F31, G15
Suggested Citation: Suggested Citation