Foreign exchange market contagion: evidence of DCC and DECO Multivariate GARCH Models
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Date
2016-06-30
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Université de M'sila
Abstract
The goal of this study is to measure contagion
phenomenon between foreign exchange markets during
Subprime crisis & Euro-Zone crisis using daily data
from 03/01/2005 to 03/09/2015 for twenty selected
countries.
In our analysis, we use the FMI classification
of exchange rate arrangements for each estimation
period. We also separated an estimation period in two
period’s crises. estimate into two crises periods.
Firstly, the US Subprime crisis period that covers the
period from 17/07/2007 through 31/08/2009 (See
Dungey, 2009, Celik, 2012), and secondly, the period
span of the Euro-zone crisis that goes from 19.11.2009
to 31.12.2012 (See Wasim. A et al 2013).The model we
use in this study is a Dynamic Equicorrelation
GARCH model of Engle and Kelly (2012) and DCCGARCH
model of Engle (2002).
In summary, we conclude that all exchange
rates returns series are influenced by the contagion
effects come from USA and euro area over 2007-2012
periods. Moreover, we observe that the mean Dynamic
conditional correlation of the multivariate GARCH
increase in financial and Euro zone crises compared
to the pre-crisis period. In addition to that, we
conclude that persistent volatility has been high in
countries adopting free floating exchange rates
compare the countries they supported managed
floaters, hard and soft begs exchange rate regimes.
Description
Keywords
Contagion, Subprime and Eurozone Crises, DCC-GARCH, DECO-GARCH, Exchange Rate Regimes.