DIVERGENCE INDICATORS AND THE VOLATILITY SMOOTHNESS IN SEMI-FIXED EXCHANGE-RATE REGIMES

Fixed or semi-fixed exchange rate regimes have volatility paths that a re in general less smooth than their free floating counterpart. Moreov er, there tends to be a correlation between the lack of smoothness and the weakness of the currency. In this article, the effects of diverge nce from central parity on the smoothness of the volatility are discus sed within the framework of a TGARCH model. It is shown that, for vari ous EMS rates, the divergence indicator has a statistically significan t effect on the smoothness of the volatility path.