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Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized Arch Model

Tim Bollerslev
The Review of Economics and Statistics
Vol. 72, No. 3 (Aug., 1990), pp. 498-505
Published by: The MIT Press
DOI: 10.2307/2109358
Stable URL: http://www.jstor.org/stable/2109358
Page Count: 8
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Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized Arch Model
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Abstract

A multivariate time series model with time varying conditional variances and covariances, but constant conditional correlations is proposed. In a multivariate regression framework, the model is readily interpreted as an extension of the Seemingly Unrelated Regression (SUR) model allowing for heteroskedasticity. Parameterizing each of the conditional variances as a univariate Generalized Autoregressive Conditional Heteroskedastic (GARCH) process, the descriptive validity of the model is illustrated for a set of five nominal European U.S. dollar exchange rates following the inception of the European Monetary System (EMS). When compared to the pre-EMS free float period, the comovements between the currencies are found to be significantly higher over the later period.

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