POLICY UNCERTAINTY AND FOREIGN EXCHANGE RATES: THE DCC-GARCH MODEL OF THE US / JAPANESE FOREIGN EXCHANGE RATE
Since the breakdown of the Bretton Woods system in the 1970s, the US / Japan foreign exchange rate has been largely influenced by policy changes in the United States and Japan. This study applies the multivariate dynamic conditional correlation (DCC) – generalized autoregressive conditional heteroscedasticity (GARCH) models to analyze the time-varying effects of policy uncertainty, measured by the economic policy uncertainty (EPU) index of Baker et al. (2013, 2016), on the US / Japan foreign exchange rate. Using the EPU index as a proxy variable, it shows that the dynamic conditional correlations between policy uncertainty and the exchange rate are not time-invariant, but even sign-changing in the sample period. The analysis also empirically examined what drives the evolution of the time-varying correlations. The driving force of the correlations is, however, mostly attributed to unknown random factors.
policy uncertainty, foreign exchange rate, DCC model, GARCH model, time-varying correlation
KAZUTAKA KURASAWA (2016). Policy Uncertainty and Foreign Exchange Rates: The DCC-GARCH Model of the US / Japanese Foreign Exchange Rate. International Journal of Economic Sciences, Vol. V(4), pp. 1-19. , DOI: 10.52950/ES.2016.5.4.001
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