A Note on the Asymmetry and Persistency of Shocks in Malaysian Exchange Rate Volatility

Abstract

This study attempts to examine the asymmetry and persistency of exchange rate volatility of the Malaysian ringgit against the USD, British pound, EURO, Japanese yen, and Singapore dollar within the framework of asymmetric component GARCH models using daily data over the period of 1st August 2005 to 24th April 2014. The empirical findings reveal mixed evidence vis-à-vis asymmetry and persistency of exchange rate shocks to the volatility of Malaysian currency against different currencies considered in the study. The estimated results exhibit that the volatility of Malaysia’s exchange rate returns can be modelled with GARCH-type conditional variance models which capture volatility characteristics well. The volatility shocks to the Malaysia’s exchange rate are found to be highly persistent against the USD while reasonably persistent against the EURO, British pound, Japanese yen and Singapore dollar. Asymmetric effects of shocks to the volatility of Malaysia’s exchange rate against the USD, EURO and the Japanese yen are evident implying positive and negative shocks pose different effects to the volatility while symmetric effects of shocks to volatility are recorded for the British Pound and Singapore dollar. The empirical findings of this study provide insights to policymakers and practitioners.