Modeling Volatility of Foreign Exchange Price Changes

This paper investigates the behavior of exchange rate volatility during appreciations and depreciations. Six US dollar exchange rates are investigated. In all instances the response of volatility to exchange rate changes is asymmetric. For dollar exchange rates with respect to EMS currencies, volatility is higher during dollar depreciations, whereas, for non‐EMS dollar exchange rates, volatility is higher during dollar appreciations. In addition, there is evidence that exchange rate changes are related to volatility.