How do monetary shock, financial crisis, and quotation reform affect the long memory of exchange rate volatility? Evidence from major currencies

Although it is widely accepted that various information flows entering a non-fully efficient foreign exchange market synergistically cause the long memory of volatility, the impact of monetary shock, an important determinant of exchange rates, has not been thoroughly investigated. We propose a new mixed-frequency long-memory time series model to analyze this. We find that monthly monetary shock has a positive effect on the long memory in countries with floating exchange rate regimes, but not for China, which has a managed floating exchange rate regime. Besides, the global financial crisis and the Chinese Yuan mid-price quotation reform in 2015 changed the pattern of exchange rate volatility, especially in export-oriented economies such as Korea and Australia. By analyzing the event backgrounds, we find that Australia's decreased post-crisis market interventions and China's market-oriented quotation reform both helped reduce the long memory. Our model performs well in forecasting the exchange rate risk.