An empirical analysis of currency volatilities during the recent global financial crisis

• Published in: Economic modelling Vol. 43; pp. 394 - 406
• Main Authors: Ozer-Imer, Itir, Ozkan, Ibrahim
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.12.2014; Elsevier Science Ltd
• Subjects: Brownian motion; Change point analysis; Correlation; Correlation analysis; Dynamic conditional correlation; Economic crisis; Economic impact; Economic models; Economic theory; Exchange rate co-movement; Financial crisis; Foreign exchange rates; Methodology; Modelling; Recent financial crisis; Studies; Volatility; Volatility spillover; Dynamic conditional correlation; Brownian motion; Change point analysis; Recent financial crisis; Exchange rate co-movement; Volatility spillover
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2014.09.008

This paper investigates the impact of the 2008–2009 global financial crisis on the co-movement of 16 currencies in the sample. It employs a two-step atheoretic empirical methodology; it i) applies change point estimation based on geometric Brownian motion to detect change points in volatilities and ii) applies Engle's (2002) dynamic conditional correlation (DCCR) approach to estimate time varying correlations and then, observes the behavior of volatility co-movements during the periods found in (i). The results show that volatilities increase at least twofold with the outbreak of the crisis and there is an inverse relationship between volatility and the duration of the crisis. The DCCRs usually increase with the onset of the crisis and they fluctuate smoothly afterwards while keeping that increased level. •The starting date of the high volatility period of each currency differs.•Volatilities increase at least twofold with the outbreak of the crisis.•There is an inverse relationship between volatility and the duration of the crisis.•The correlations increase, remain high and fluctuate smoothly during the crisis.•The crisis does change the correlation structure between currency returns.