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The Volatility of Real Exchange Rates: The Australian Case
Author(s) -
Henry Olan T.,
Summers Peter M.
Publication year - 1999
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.00043
Subject(s) - autoregressive conditional heteroskedasticity , exchange rate , economics , econometrics , volatility (finance) , index (typography) , explanatory power , financial economics , monetary economics , computer science , world wide web , philosophy , epistemology
This paper presents an empirical investigation into factors underlying the real U.S.‐Australian dollar exchange rate. We find that the random walk model of the real exchange rate can be improved by various GARCH specifications. In particular, we find that the estimated risk premium from a GARCH‐M model is not robust to model specification. When the model is extended to include the $US/Yen real exchange rate and an index of commodity prices the GARCH‐in‐mean term is no longer significant. The additional variables seem to account for the increased volatility of the real exchange rate in the post‐1983 period. Somewhat surprisingly, we find that changes in the Australian term spread and US‐Australian interest rate differential have little or no explanatory power for the real exchange rate.