Effect of exchange rate return on volatility spill-over across trading regions

This paper examines the effect of realized exchange rate returns on the volatility spill-over between the euro-US dollar and US dollar-yen currency pairs across the five trading regions: Asia, Asia-Europe overlap, Europe, Europe-America overlap and America. Modelling the interaction between returns and volatility in an autoregressive five-equation system, we find evidence that depreciation of the US dollar against the yen has a greater impact on the US dollar-yen volatility spill-over than appreciation in the subprime crisis period. Appreciation and depreciation of the US dollar against the euro does not appear to have an asymmetric effect on the euro-US dollar volatility spill-over. Our results support the notion that the yen may have been preferred to the euro as a safe-haven currency relative to the US dollar during the subprime crisis period.