Correlations and spillovers among three euro rates: evidence using realised variance

Citation

McMillan D, Ruiz I & Speight AEH (2010) Correlations and spillovers among three euro rates: evidence using realised variance. European Journal of Finance, 16 (8), pp. 753-767. https://doi.org/10.1080/13518470903448424

Abstract
This paper uses three euro exchange rates - the US dollar, sterling and yen - to test for the presence of volatility spillovers and time-varying correlations using the realised variance approach, which has significant advantages over the multivariate-GARCH methodology. Our results suggest that the three currencies do exhibit some degree of volatility spillover and hence commonality in the driving force behind volatility movement. With regard to the nature of time-variation within the correlation coefficients, there is substantial evidence that correlations are time-varying but that the strength of correlation coefficients has not increased over the sample period. Furthermore, there is evidence that correlations themselves are predictable and interrelated. These results support the view that the three rates do exhibit interrelationships, commonality and time-varying correlation, factors that are important to portfolio managers. This latter point is illustrated by using the realised variances and covariances to determine portfolio weights, the portfolio variance of which is lower than constructing portfolios using (rolling) unconditional values.

Keywords
exchange rates; spillovers; correlation; realised variance

Journal
European Journal of Finance: Volume 16, Issue 8

People

Professor David McMillan

Professor in Finance, Accounting & Finance