本論文主要探討匯率與利率之間波動之關連性，分兩個研究主題來分析。第一主題利用時間序列模型來探討匯率與利率波動間之相關性。過去研究匯率與利率報酬波動率文獻，均假設條件變異數與共變數之間沒有交互作用。然而，兩個市場的波動在實證上若有關聯時，此假設將導致我們無法探討兩個市場之間的關聯性或外溢效果。因此，本研究利用Engle and Kroner (1995)提出的BEKK模型，來捕捉匯率與利率波動度間相關性的動態過程。本研究採用1978年至2009年G7國家匯率與利率資料，檢定兩市場波動是否有顯著的外溢現象。實證結果顯示英國、歐元會員國、加拿大的匯率市場與利率市場存在雙向的波動外溢效果。因此，可說明兩個市場間的波動是有相關聯的。
第二主題從擴散隨機模型來探討匯率與利率之間的關係。過去文獻假設匯率與利率的動態過程是遵循著擴散隨機過程，不會有跳躍不連續的情形發生。但越來越多的實證研究發現連續性的擴散隨機模式無法完全捕捉上述變數的動態過程。因此本文針對匯率與利率不連續變動方面進行研究，假設匯率與利率服從跳躍擴散隨機過程。本文利用未拋補利率平價說(uncovered interest rate parity)探討兩變數之間關聯，並進一步延伸將系統風險區分成連續性系統風險與跳躍性系統風險。在實證分析方面，本文利用2005年至2010年G7國家匯率與利率的報酬，檢定當利率發生跳躍現象，是否會對預期匯率產生影響。實證結果顯示跳躍擴散模型比純粹擴散模型有較佳的解釋能力。對部份G7國家而言，當利率市場發生跳躍時，跳躍性系統風險對預期匯率存在顯著的關聯性。

This dissertation investigates the volatility of the relationships between exchange rates and interest rates. The first part of the paper explores the transmission relationship between these two markets using a time-series model. Previous studies have assumed that covariance was constant in both markets. However, if the volatilities of the exchange rate and interest rate markets are correlated over time, the interaction and spillover effects between the two markets may be affected by time-varying covariance. Hence, this paper utilizes the BEKK-GARCH model developed by Engle and Kroner (1995) to capture the dynamic relationship between the exchange rates and interest rates. This study uses the returns data for G7 members’ exchange rates and interest rates to test whether these markets exhibited volatilities spillover from 1978 to 2009. The results show bi-directional volatility spillovers in the markets of the UK, the Euro countries, and Canada, where the volatilities of the two markets were interrelated.
The second part of the paper explores the relationship between exchange rates and interest rates using a jump diffusion model. Previous studies assumed that the dynamic processes of exchange rates and interest rates follow a diffusion process with a continuous time path, but an increasing number of empirical studies have shown that a continuous diffusion stochastic model does not capture the dynamic process of these variables. Thus, this paper investigates the discontinuous variables of exchange rates and interest rates and assumes that these variables follow a jump diffusion process. The UIRP model is employed to explore the relationship between both variables and to divide the systematic risk into systematic continuous risk and systematic jump risk. The returns data for G7 members’ exchange rates and interest rates from 2005 to 2010 were analyzed to test whether the expected exchange rate is affected by jump components when the interest rate market experiences a jump. The results show that the jump diffusion model has more explanatory power than the pure diffusion model does, and, when the interest rate market experiences a jump risk, the systematic jump risk has a significant relationship with the expected exchange rates in some G7 countries.

Chapter 1: Introduction 1
1.1. Motivations and contribution in the volatility transmission 2
1.2. Motivations and contribution in the systematic risk and jump risk 7
Chapter 2: Literature reviews 13
2.1. Literature related to volatility spillovers 13
2.2. Literature related to systematic risk of jump and UIRP 15
Chapter 3: Estimation of volatility transmission between exchange rate and interest rate markets 18
3.1. Theoretical framework 18
3.2. Model structure of BEKK GARCH 21
3.3. Hypothesis 23
3.4. Empirical results 24
Chapter 4: Estimation of systematic continuous risk and systematic jump risk 43
4.1. The model 43
4.2. Empirical properties of the data 46
4.3. Separate the continuous process and jump process from the systematic risk 50
4.4. Separate nonsystematic risk into continuous and jump components 54
Chapter 5: Conclusions and suggestions 56
References 59
Appendix 66

Aı¨t-Sahalia, Y. (2004), “Disentangling Diffusion from Jumps”, Journal of financial Economics, 74, 487-528.
Anderson T. and T. Bollerslev (1998), “Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts”, International Economic Review, 39, 885-905.
Anderson, T., T. Bollerslev and F. Diebold (2007), “Roughing It Up: Disentangling Continuous and Jump Components in Measuring, Modeling and Forecasting Asset Return volatility”, Journal of Economics and Statistics, 89, 701-720.
Ahn, C. M., D. C. Cho and K. Park (2007), “The Pricing of Foreign Currency Options under Jump-Diffusion Processes”, The Journal of Futures Markets, 27, 669-695.
Bansal, R. and M. Dahlquist (2000), “The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies”, Journal of International Economics, 51, 115-144.
Barndorff, N. O. and N. Shephard (2004), “Power and Bi-Power Variation with Stochastic Volatility and Jumps”, Journal of Financial econometrics, 2, 1-48.
Bekaert, G. and R. J. Hodrick (2001), “Expectations Hypotheses Tests”, The journal of Finance, 56, 1357-1394.
Bollerslev, T., R. Y. Chou and K. F. Kroner (1992), “ARCH Modeling in Finance,” Journal of Econometrics, 52, 5-59.
Chan, K., K. C. Chan, and G. A. Karolyi (1991), “Intraday Volatility in the Stock Index and Stock Index Futures Market”, Review of Financial Studies, 4, 657-684.
Cumby, R. E. and M. Obstfeld (1981), “A Note on Exchange-Rate Expectations and Nominal Interest Differentials: A Test of the Fisher Hypothesis”, Journal of Finance, 36, 697–703.
Das, S. R. (2002), “The Surprise Element: Jumps in Interest Rates”, Journal of Econometrics, 106, 27-65.
Dooley, M. P. (1995), “A Survey of Academic Literature on Controls over International Capital Transactions”, NBER Working Paper #5352.
Dooley, M. P., D. J. Mathieson and L. Rojas-Suarez (1997), “Capital Mobility and Exchange Market Intervention in Developing Countries”, NBER Working Paper #6247.
Duffie, D., J. Pan, and K. Singleton (2000), “Transform Analysis and Option Pricing for Affine Jump-Diffusions”, Econometrica, 68, 1343–1376.
Dunham, L. M. and G. C. Friesen (2008), “An Empirical Examination of Jump Risk in U.S. Equity and Bond Markets ”, North American Actuarial Journal, 11, 76-91.
Edison, H. J. and B. D. Pauls (1993), “A Re-assessment of the Relationship between Real Exchange Rates and Real Interest Rates: 1974-1990”, Journal of Monetary Economics, 31, 165-187.
Engle, R. F. and T. Bollerslev (1986), “Modeling the Persistence of Conditional Variances”, Econometric Reviews, 5, 1-50.
Engle, R. F. and K. F. Kroner (1995), “Multivariate Simultaneous Generalized GARCH”, Econometric Theory, 11, 122-150.
Engle, R. F. (2004), “Risk and Volatility: Econometric Models and Financial Practice”, American Economic Review, 94, 405-420.
Frenkel, J. A. and R. M. Levich (1975), “Covered Interest Arbitrage: Unexploited Profits?”, Journal of Political Economy, 83, 325-338.
Froot, K. A. and R. H. Thaler (1990), “Foreign Exchange”, Journal of Economic Perspectives, 4, 179-192.
Heston, S. L. (1993), “A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options”, The Review of Financial Studies, 6, 327-343.
Heston, S. L. (2007), “A Model of Discontinuous Interest Rate Behaviour, Yield Curves and Volatility”, Review of Derivatives Research, 10, 205-225.
Hatemi-J, A. and M. Irandoust (2000), “Exchange Rates and Interest Rates: Can Their Causality Explain International Capital Mobility”, The International Trade Journal, 14, 299-314.
Ito, T. (1988), “Use of (Time-Domain) Vector Autoregressions to Test Uncovered Interest Parity”, The Review of Economics and Statistics, 70, 296-305.
Johnson, G. and T. Schneeweis (1994), “Jump-Diffusion Processes in the Foreign Exchange Markets and the Release of Macroeconomic News”, Computational Economics, 7, 309-329.
Kanas, A. (2000), “Volatility Spillovers between Stock Returns and Exchange Rate Changes: International Evidence”, Journal of Business Finance and Accounting, 27, 447-467.
King, M. A. and S. Wadhwani (1990), “Transmission of Volatility between Stock Markets”, The Review of Financial Studies, 3, 5-33.
Koutmos, G. and G. G. Booth (1995), “Asymmetric Volatility Transmission in International Stock Markets”, Journal of International Money and Finance, 14, 747-762.
Koutmos, G. and M. Tucker (1996), “Temporal Relationships and Dynamic Interactions between Spot and Futures Stock Markets”, Journal of Futures Markets, 16, 55-69.
Koutmos, G. and A. D. Martin (2003), “Asymmetric Exchange Rate Exposure: Theory and Evidence”, Journal of International Money and Finance, 22, 365-383.
Kroner, K. E. and V. K. Ng (1998), “Modeling Asymmetric Comovements of Asset Returns”, Review of Financial Studies, 11, 817-844.
Martens, M. and S. Poon (2001), “Returns Synchronization and Daily Correlation Dynamics between International Stock Markets”, Journal of Banking and Finance, 25, 1805-1827.
McCurdy, T. H. and I. G. Morgan (1991), “Tests for a Systematic Risk Component in Deviations from Uncovered Interest Rate Parity”, Review of Economic Studies, 58, 587-602.
McCallum, B. T. (1994), “A Reconsideration of the Uncovered Interest Parity Relationship”, Journal of Monetary Economics, 33, 105-132.
Meese, R. and K. S. Rogoff (1988), “What is Real? The Exchange Rate-Interest Rate Differential Relation over the Modern Floating-Rate Period”, Journal of Finance, 43, 933-948.
Merton, R. C. (1976), “Option Pricing when Underlying Stock Returns are Discontinuous”, Journal of Financial Economic, 3, 125–144.
Meredith, G. and M. D. Chinn (1998), “Long-Horizon Uncovered Interest Rate Parity” , NBER Working Paper #6797.
Morana, C (2002), “IGARCH Effects: an Interpretation”, Applied Economics Letters, 9, 745-748.
Moh, Y. K. (2006), “Continuous-Time Model of Uncovered Interest Parity with Regulated Jump-Diffusion Interest Differential”, Applied Economics, 38, 2523-2533.
Naik, V. and M. Lee (1990), “General Equilibrium Pricing of Options on the Market Portfolio with Discontinuous Returns”, Review of Financial Studies 3, 493-521.
Ngama, Y. L. (1994), “Testing for the Presence of Time-Varying Risk Premium Using a Mean-Conditional Variance Optimization Model”, Oxford Bulletin of Economics and Statistics, 56, 189-208.
Pérignon, C., Z. Y. Deng and Z. J. Wang (2008), “Do Banks Overstate their Value-at-Risk?”, Journal of Banking and Finance, 32, 783-794.
Pi-Anguita, J. V. (1998), “Real Exchange Rate, Interest Rate and Capital Movements: Evidence for France”, Applied Economics Letters, 5, 305-307.
Ross, S. A. (1989), “Information and Volatility: the No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy”, Journal of Finance, 44, 1, 1-17.
So, R. W. (2001), “Price and Volatility Spillovers between Interest Rate and Exchange Value of the US Dollar”, Global Finance Journal, 12, 95-107.
Suliman, O. (2005), “Interest Rate Volatility, Exchange Rates, and External Contagion”, Applied Financial Economics, 15, 883-894.
Tauchen, G. and H. Zhou (2006), “Realized Jumps on Financial Markets and Predicting Credit Spreads”, Finance and Economics Discussion Series, 2006-2035, Board of Governors of the Federal Reserve System.
Theodossiou, P. and U. Lee (1993), “Mean and Volatility Spillovers across Major National Stock Markets: Further Empirical Evidence”, Journal of Financial Research, 4, 337-350.
Throop, A. (1994), “A Generalized Uncovered Interest Rate Parity Model of Real Exchange Rates”, Federal Reserve Bank of San Francisco Working Paper.
Toda, H. Y. and T. Yamamoto (1995), “Statistical Inference in Vector Autoregressions with Possibly Integrated Processes”, Journal of Econometrics, 66, 225-250.
Tse, Y. and G. G. Booth (1996), “Common Volatility and Volatility Spillovers between US and Eurodollar Interest Rates: Evidence from the Futures Market”, Journal of Economics and Business, 48, 299-312.
Tse, Y. K., and S. L. Yip (2006), “Exchange-Rate Systems and Interest-Rate Behaviour: The experience of Hong Kong and Singapore”, International Review of Economics and Finance, 15, 212-227.
Wang P. (2011), “Pricing Currency Options with Support Vector Regression and Stochastic Volatility Model with Jumps”, Expert Systems with Application, 38, 1-7.