THE CONDITIONAL HETEROSCEDASTICITY OF THE YEN-DOLLAR EXCHANGE-RATE

This paper examines the conditional heteroscedasticity of the yen-doll ar exchange rate. A model is constructed by extending the asymmetric p ower autoregressive conditional heteroscedasticity model to a process that is fractionally integrated. It is found that, unlike the equity m arkets, the appreciation and depreciation shocks of the yen against th e dollar have similar effects on future volatilities, Although the res ults reject both the stable and the integrated models, our analysis of the response coefficients of the past shocks and the application of t he models to the estimation of the capital requirements for trading th e currencies show that there are no substantial differences between th e fractionally integrated models and the stable models. (C) 1998 John Wiley & Sons, Ltd.