European exchange rate volatility dynamics: an empirical investigation

The hourly and daily dummy variables in the conditional variance functions of the two European currencies, the British pound and the euro are estimated. The conditional variance functions are specified as GARCH models to capture the time-dependent conditional heteroskedasticty at both the hourly and daily recorded data. The estimated dummy variables give remarkably similar and distinct characteristics of the volatility dynamics embodied in the two currencies. Some discussion of the possible sources of the observed volatility dynamics in the two currencies is provided. A comparison between GARCH, FIGARCH and SV models is also provided. The estimated hourly and daily dummy variables suggests that euro is considerably more volatile when compared to British pound, a result with important implications for the economic policy making in the two regions.