Foreign exchange market and contagion: The evidence through GARCH model

Abstract

The goal of this study is to measure contagion phenomenon between foreign exchange markets during Subprime crisis & Eurozone crisis using daily data from 03/01/2005 to 02/01/2014 for fourteen selected countries namely Algeria, Argentina, Australia, china, India, Iceland, Great Britain, Malaysia, Nigeria, New-Zealand, Norway, Mexico, the Philippines and Russia via GARCH (1,1), GJR-GARCH(1,1), EGARCH(1,1), APARCH(1,1) models. In our analysis, we will have discriminated between independent floaters and managed floaters exchange rate. We also separated the period estimate in two period’s crises. Firstly, the US Subprime crisis period covers from 17/07/2007 through 31/08/2009 (See Dungey, 2009, Celik, 2012). Secondly, the period of the Euro-zone crisis that we have covered from 19.11.2009 to 31.12.2012 (See Wasim. A et all 2013). In summary, we concluded of all exchange rates returns series influenced by the contagion effects come from USA and euro area over 2007-2012 periods. In addition to that, we documented that persistence volatility have been high shock in the countries adopting independent floating exchange rates compare the countries they supported managed floaters.