Modeling volatility and news-related issues: evidence from the FX market

Purpose National currencies have been under permanent pressure due to continuous shocks in the world economy. The global financial meltdown of 2008/09 and the Greek debt crisis of 2010/11 placed the FX market on a free flow. The other two non-economic shocks—COVID-19 and the Russia-Ukraine war—activated central bank mechanisms to smooth enormous currency swings. For this purpose, this study aims to investigate the volatility issues of the three most traded parities in the FX market. Design/methodology/approach The series for EUR/USD, USD/JPY and GBP/USD are daily and cover the period from January 1, 2007 to January 1, 2024. The standard Generalized Autoregressive Conditional Heteroscedastic (s-GARCH) models and their two other variants perform our estimated results. Findings The exponential GARCH (e-GARCH hereafter) and Glosten-Jagannathan-Runkle GARCH (GJR-GARCH) were used simultaneously. E-GARCH appears to be the best-fitted asymmetric model of the three univariate models. The GARCH term higher than 0.9 shows that adverse shocks keep a long-lasting memory on the conditional variance of the three studied pairs. The estimates show that “bad news” affects returns much more than “good news.” Regarding portfolio allocation, USD/JPY is a more stable investment than EUR/USD and GBP/USD. Originality/value The findings provide reliable signals to market participants and portfolio managers on volatility issues and the news reaction. The work uniquely analyzes the three most traded FX pairs under four major global shocks, offering new insights into the asymmetric volatility dynamics of the studied FX pairs. By using both financial and non-financial shocks, it expands the understanding of currency pair behavior that can enhance risk management and strategic investment decisions.