Common Volatility across Latin American Foreign Exchange Markets

Isabel Ruiz, Sam Houston State University

Abstract

This paper uses high frequency exchange rate data for a group of thirteen Latin American countries in order to analyze volatility comovements. Particular interest is posed on understanding the existence of a common volatility process during the 1995-2008 period. The analysis relies on bivariate common factor models. We test for second-order common features using the common ARCH-feature methodology developed by Engle and Kozicki (1993). Overall, the results of this paper indicate that while most currencies display evidence of time-varying variance, the volatility movements in the Latin American foreign exchange markets seems to be mainly country specific. Common volatility processes seem to be present only for a few South American markets.