<abstract xmlns="http://www.w3.org/1999/xhtml">

<sec><h3>Research background</h3>
<p>The main purpose of monetary integration between EU countries is to eliminate excessive fluctuations in exchange rates. High volatility in exchange rates can cause various negative economic and financial effects, especially during periods of economic shocks. In addition, estimating the volatility between currencies and their interactions is of great importance for effective portfolio management.</p>
</sec>
<sec><h3>Purpose</h3>
<p>The objective of this research is to scrutinize the transmission of volatility between the currencies of those European Union nations that do not participate in the EURO area, focusing on the exchange rate parity of the US Dollar with seven non-EURO zone currencies.</p>
</sec>
<sec><h3>Research methodology</h3>
<p>Daily volatility in exchange rates was calculated using the Garman-Klass-Yang-Zhang (GK-YZ) method. To investigate the connectedness between these volatilities, we used the Time-Varying Parameter Vector Autoregression (TVP-VAR) frequency connectedness approach.</p>
</sec>
<sec><h3>Results</h3>
<p>The Average Total Connectedness Index exhibits a significant degree of connectedness of approximately 71.84%. The Net Total Directional Connectedness Index indicates that the CZK, DKK and RON exchange rates are net beneficiaries in aggregate and in a longer term perspective, whereas the DKK, HUF and PLN exchange rates are net beneficiaries in a shorter term horizon. In the context of major global events such as the onset of the COVID-19 outbreak in March 2020 and the start of the Russia-Ukraine conflict in February 2022, it could be observed that the dynamic Total Connectedness Index exhibited a substantial increase, both overall and from a long-term perspective, corroborating theoretical expectations. According to the Net Pairwise Directional Connectedness index, the highest bilateral connectedness overall and in the short run was between DKK and RON, while in the long run between BGN and DKK.</p>
</sec>
<sec><h3>Novelty</h3>
<p>Examining the connectedness of currencies is of great importance for investors doing business with foreign currency, international cooperation and policies, risk management and portfolio management. Determining the connectedness in different frequency (short and long-term) ranges provides important information for hedging risk. In addition, the bilateral connectedness between currencies is a guide for effective portfolio diversification.</p>
</sec>
</abstract>

Research background
The main purpose of monetary integration between EU countries is to eliminate excessive fluctuations in exchange rates. High volatility in exchange rates can cause various negative economic and financial effects, especially during periods of economic shocks. In addition, estimating the volatility between currencies and their interactions is of great importance for effective portfolio management.

Purpose
The objective of this research is to scrutinize the transmission of volatility between the currencies of those European Union nations that do not participate in the EURO area, focusing on the exchange rate parity of the US Dollar with seven non-EURO zone currencies.

Research methodology
Daily volatility in exchange rates was calculated using the Garman-Klass-Yang-Zhang (GK-YZ) method. To investigate the connectedness between these volatilities, we used the Time-Varying Parameter Vector Autoregression (TVP-VAR) frequency connectedness approach.

Results
The Average Total Connectedness Index exhibits a significant degree of connectedness of approximately 71.84%. The Net Total Directional Connectedness Index indicates that the CZK, DKK and RON exchange rates are net beneficiaries in aggregate and in a longer term perspective, whereas the DKK, HUF and PLN exchange rates are net beneficiaries in a shorter term horizon. In the context of major global events such as the onset of the COVID-19 outbreak in March 2020 and the start of the Russia-Ukraine conflict in February 2022, it could be observed that the dynamic Total Connectedness Index exhibited a substantial increase, both overall and from a long-term perspective, corroborating theoretical expectations. According to the Net Pairwise Directional Connectedness index, the highest bilateral connectedness overall and in the short run was between DKK and RON, while in the long run between BGN and DKK.

Novelty
Examining the connectedness of currencies is of great importance for investors doing business with foreign currency, international cooperation and policies, risk management and portfolio management. Determining the connectedness in different frequency (short and long-term) ranges provides important information for hedging risk. In addition, the bilateral connectedness between currencies is a guide for effective portfolio diversification.

TVP-VAR Frequency Connectedness Between the Foreign Exchange Rates of Non-Euro Area Member Countries

Folia Oeconomica Stetinensia

This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License.

Research background
The main purpose of monetary integration between EU countries is to eliminate excessive fluctuations in exchange rates. High volatility in...

TVP-VAR Frequency Connectedness Between the Foreign Exchange Rates of Non-Euro Area Member Countries

Publié en ligne: 09 déc. 2023

Pages: 1 - 23

Reçu: 05 juin 2023

Accepté: 08 août 2023

DOI: https://doi.org/10.2478/foli-2023-0016

Mots clés
Garman-Klass-Yang-Zhang, FOREX markets, Non-Euro Area, Pairwise Connectedness Index, TVP-VAR Frequency Connectedness, Volatility transmission

© 2023 Nesrin Akbulut et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License.

TVP-VAR Frequency Connectedness Between the Foreign Exchange Rates of Non-Euro Area Member Countries

Publié en ligne: 09 déc. 2023

Pages: 1 - 23

Reçu: 05 juin 2023

Accepté: 08 août 2023

DOI: https://doi.org/10.2478/foli-2023-0016

Mots clésGarman-Klass-Yang-Zhang, FOREX markets, Non-Euro Area, Pairwise Connectedness Index, TVP-VAR Frequency Connectedness, Volatility transmission

© 2023 Nesrin Akbulut et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License.

Mots clés
Garman-Klass-Yang-Zhang, FOREX markets, Non-Euro Area, Pairwise Connectedness Index, TVP-VAR Frequency Connectedness, Volatility transmission