Daily Rp/USD stochastic volatility and the policy implication lesson

This research finds the Rp/USD stochastic volatility is cyclical. It is uncovered also that, against the popular belief, the major peaks of Rp/USD stochastic volatility are predominantly shadowed by appreciations. The distance between major volatility peaks, as well as between the major preceding-immediate troughs and peaks are also found to become shorter toward the end of observation. However, the last 100 observations, the Rp/USD stochastic volatility becomes I(1), that is random walk. All of these findings bring about policy implications that future short run policy response to maintain the stability of Rp/USD cannot ignore the timing, the proper magnitude, and the right signal. The long run random walk characteristic of the Rp/USD volatility also suggests the change of strategy in the policy to stabilize the currency, by imposing the band around the stochastic volatility.