Global Volatility and Forex Returns in East Asia

During 2001-2010, increases in mature market volatility were associated with declines in forex returns for East Asian economies, consistent with an overall `flight to safety' effect. Estimates from GARCH models suggest that a 10 percentage point increase in mature market equity volatility generated an exchange rate depreciation of up to 3/4 percent. This sensitivity rose during a more tranquil subsample for some countries, reflecting their greater integration with global financial markets. Long-run forex volatility increased in Asian economies after 2008, reflecting the global reach of the financial crisis in mature markets. Unconditional standard deviations estimated from these models provide operational measures of `long-term' and ` excess' volatility in forex markets.