European Currency Volatility after Economic and Monetary Union

Abstract

Corporate and institutional foreign exchange market participants are sensitive to the effects of volatility on their day-to-day trading activities and so an important question is whether the introduction of the euro had an impact on foreign exchange rate volatility. Rather than compare individual currencies with the Euro we compare the pre 1999 volatility of three synthetic euro exchange rate series with the volatility of the actual euro starting from the 1st of January 1999. Volatility tests are undertaken within a GARCH framework. There is evidence of a statistically significant increase in transatlantic exchange rate volatility following the introduction of the euro. Acknowledgements: We would like to express our thanks to the staff in the School of Finance and Applied Statistics at the ANU, particularly Dr Chris Bilson for his support and guidance.