This dissertation investigates the volatility of the relationships between exchange rates and interest rates. The first part of the paper explores the transmission relationship between these two markets using a time-series model. Previous studies have assumed that covariance was constant in both markets. However, if the volatilities of the exchange rate and interest rate markets are correlated over time, the interaction and spillover effects between the two markets may be affected by time-varying covariance. Hence, this paper utilizes the BEKK-GARCH model developed by Engle and Kroner (1995) to capture the dynamic relationship between the exchange rates and interest rates. This study uses the returns data for G7 members¡¦ exchange rates and interest rates to test whether these markets exhibited volatilities spillover from 1978 to 2009. The results show bi-directional volatility spillovers in the markets of the UK, the Euro countries, and Canada, where the volatilities of the two markets were interrelated.
The second part of the paper explores the relationship between exchange rates and interest rates using a jump diffusion model. Previous studies assumed that the dynamic processes of exchange rates and interest rates follow a diffusion process with a continuous time path, but an increasing number of empirical studies have shown that a continuous diffusion stochastic model does not capture the dynamic process of these variables. Thus, this paper investigates the discontinuous variables of exchange rates and interest rates and assumes that these variables follow a jump diffusion process. The UIRP model is employed to explore the relationship between both variables and to divide the systematic risk into systematic continuous risk and systematic jump risk. The returns data for G7 members¡¦ exchange rates and interest rates from 2005 to 2010 were analyzed to test whether the expected exchange rate is affected by jump components when the interest rate market experiences a jump. The results show that the jump diffusion model has more explanatory power than the pure diffusion model does, and, when the interest rate market experiences a jump risk, the systematic jump risk has a significant relationship with the expected exchange rates in some G7 countries.
| Identifer | oai:union.ndltd.org:NSYSU/oai:NSYSU:etd-0706111-170838 |
| Date | 06 July 2011 |
| Creators | Kao, Chiu-Fen |
| Contributors | Cheng-Feng Lee, David Shyu, Yu-Chuan Huang, Hsioujen Kuo, Ming-Chi Chen |
| Publisher | NSYSU |
| Source Sets | NSYSU Electronic Thesis and Dissertation Archive |
| Language | English |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-0706111-170838 |
| Rights | campus_withheld, Copyright information available at source archive |
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