Title: Volatility dynamics in three euro exchange rates: correlations, spillovers and commonality

Authors: David G. McMillan, Isabel Ruiz

Addresses: School of Management, University of St Andrews, The Gateway, North Haugh, St. Andrews, KY16 9SS, UK. ' Department of Economics, Sam Houston State University, Huntsville, TX 77341-2118, USA

Abstract: In this paper we use three euro exchange rates to test for the presence of volatility spillovers, common volatility components and time-varying correlations using the multivariate-GARCH model and the common volatility methodology approach proposed by Engle and Kozicki (1993). Our results suggest that the three currencies exhibit some degree of volatility spillover and commonality in the driving force behind volatility movement. With regard to the nature of time-variation within the correlation coefficients the results indicate that correlations are time-varying but that the strength of the correlation coefficients has not increased over the sample period. These results support the view that while the three rates do exhibit some interrelationships, there is no evidence of continually increasing integration. This suggests that on the one hand there remains room for international diversification, and on the other hand that market participants have to take account of risk arising from idiosyncratic movement within the series.

Keywords: euro exchange rates; common volatility; co-movement; correlation; multivariate GARCH; volatility dynamics; correlations; volatility spillovers; commonality; international diversification.

DOI: 10.1504/IJFMD.2009.028945

International Journal of Financial Markets and Derivatives, 2009 Vol.1 No.1, pp.64 - 74

Available online: 14 Oct 2009 *

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