Modeling exchange rate volatility and volatility transmission between the Philippine peso and Indonesian rupiah for the period January 1996 to June 2000

The thrust of this paper is to investigate the linkage of the volatility of exchange rates of currencies which were adversely affected during the recent Asian currency crisis. Specifically, the study attempts to confirm the presence of volatility transmission and compares the temporal behavior of the transmission between the Philippine peso and Indonesian rupiah for the pre-crisis, crisis, and post-crisis subperiods. The plan for the rest of this paper is as follows. Models for the volatility of the peso and the rupiah will first be estimated using univariate GARCH (1,1) specifications. These models will then be used to prove our hypotheses on the behavior of exchange rate volatility. Next, vector auto regression (VAR) will be employed to simultaneously model returns (volatility) transmission between the currencies under study. Said models will prove the existence or non-existence of volatility transmission between the currencies. Finally, the VAR model for both currencies will be estimated on the overall, pre-crisis, and post-crisis periods to discover the effects, if any, of the Asian currency crisis on the volatility transmission between the two currencies. The study confirms the presence of own-market volatility transmission for both currencies. We also find evidence of volatility transmission for all subperiods except the pre-crisis period. Effects of the Asian currency crisis are still evident during the post-crisis subperiod specification. Furthermore, results of the study support the conjecture that volatility transmission is greater during periods of turbulence than during periods of relative calm. Finally, the paper discusses market contagion as the driving force behind volatility spillovers among currencies