Effects of Financial Crises on the Long Memory Volatility Dependency of Foreign Exchange Rates: The Asian Crisis vs. the Global Crisis*

By Han, Young Wook | Journal of East Asian Economic Integration, March 2014 | Go to article overview

Effects of Financial Crises on the Long Memory Volatility Dependency of Foreign Exchange Rates: The Asian Crisis vs. the Global Crisis*


Han, Young Wook, Journal of East Asian Economic Integration


This paper examines the effects of financial crises on the long memory volatility dependency of daily exchange returns focusing on the Asian crisis in 97-98 and the Global crisis in 08-09. By using the daily KRW-USD and JPY-USD exchange rates which have different trading regions and volumes, this paper first applies both the parametric FIGARCH model and the semi-parametric Local Whittle method to estimate the long memory volatility dependency of the daily returns and the temporally aggregated returns of the two exchange rates. Then it compares the effects of the two financial crises on the long memory volatility dependency of the daily returns. The estimation results reflect that the long memory volatility dependency of the KRW-USD is generally greater than that of the JPY-USD returns and the long memory dependency of the two returns appears to be invariant to temporal aggregation. And, the two financial crises appear to affect the volatility dynamics of all the returns by inducing greater long memory dependency in the volatility process of the exchange returns, but the degree of the effects of the two crises seems to be different on the exchange rates.

Keywords: Daily Foreign Exchange Rate, Financial Crisis, Long Memory Volatility Dependency, FIGARCH Model, Local Whittle Method, Temporal Aggregation.

JEL Classification: C14, C22, F31, G15

(ProQuest: ... denotes formulae omitted.)

I. Introduction

This paper is concerned with the intriguing effects of financial crises on the long memory volatility dependency of daily foreign exchange rates. It has been well known that many financial time series data including foreign exchange rates exhibit the long memory dependency intrinsic to their conditional variance process with quite persistent and hyperbolic decaying autocorrelations (Baillie, 1996). And, there has been quite interest in finding the reasons and underlying causes for the empirical findings of the long memory dependency in the conditional variance process. Granger and Ding (1995) has presented that the contemporaneous aggregation of the stable Generalized Autoregressive Conditional Heteroskedasticity (GARCH) process can result in very persistent autocorrelations which is the typical feature of the long memory property. And, Andersen and Bollerslev (1997) has shown that the contemporaneous aggregation of weakly dependent information flow process can produce the long memory property in the conditional variance process.

While some papers have argued that the aggregation is behind the long memory property and the aggregation of heterogeneous individual Autoregressive (AR) process may produce the long memory property, other papers have suggested that the observed long memory property may be generated by the presence of various types of structural breaks or regime switches in financial markets. In particular, the empirical studies including Granger and Hyung (2004) and Choi and Zivot (2007) have presented the evidence that spurious long memory can be due to the presence of occasional structural breaks detected in the financial time series, and they have conjectured that the long memory persistence may be overstated due to the presence of the structural breaks. Similarly, Granger and Terasvirta (1999) and Diebold and Inoue (2001) have presented that a process that switches the regime or switches in sign could have the characteristics of the long memory property.

Furthermore, the financial crisis marked by several reasons including the sharp decrease in credit or the collapse of exchange rate regime generate extreme disruption of normal functions of financial and monetary system, thereby hurting the efficiency of the economy (Fratzscher, 2009; Kohler, 2010; Razin and Rosefielde, 2011; Goldstein and Razin, 2013)1. Clearly the last few years have been characterized by great turmoil in the world financial system. In this context, this paper focuses on the two important financial crises which affected the world foreign exchange markets significantly, the Asian crisis in 1997-1998 and the Global crisis in 2008-2009. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Effects of Financial Crises on the Long Memory Volatility Dependency of Foreign Exchange Rates: The Asian Crisis vs. the Global Crisis*
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.