THE FINANCIAL REVIEW VOL. zyxwv 29 No. 2 MAY 1994 PP. 193-221 The Stochastic Properties of Major Canadian Exchange Rates zy Panayiotis Theodossiou" Abstract zyxw This paper extends the results of Akgiray and Booth zy [2] on the stochastic properties of five major Canadian exchange rates using the EGARCH-M model along with the generalized error distribution (GED). In addition to the issue of first- and second-order dependencies, explored by the authors, the paper (1) addresses the issue of asym- metric volatility, (2) examines the extent to which vola- tility affects future movements in these exchange rates, (3) measures the amount of kurtosis in the data, and zyx (4) investigates the transmission mechanism of innovations and volatility shocks across the five Canadian exchange rate markets. The five Canadian dollar exchange rates are for the US. dollar, the Japanese yen, the British pound, the German mark, and the French franc. Changes in Canadian exchange rates are conditionally heteroske- dastic, a finding which is in line with that of Akgiray and Booth [2]. There is no evidence supporting the assertion that volatility triggers such changes. The hypothesis of asymmetric volatility is rejected for all Canadian ex- change rates; thus unexpected appreciations and depre- ciations of the Canadian currency have similar impact on future volatility of these exchange rates. Innovations in the Canadian exchange rate markets for the US. dollar, the British pound, and French franc influence the Japa- nese yen market, while innovations in the markets of the British pound and German mark influence the French franc market. Significant but negative volatility spill- overs radiate from the German mark market to the U.S. dollar market and from the French franc market to the German mark market, resulting in lower levels of vola- tility in both the U.S. and German markets. The distri- butions of all five series of Canadian exchange rates are highly leptokurtic relative to the normal distribution. The GED distribution provides a good characterization of these distributions. *School of Business, Rutgers University, Camden, NJ 08102. The author would like to thank Erkin Bairam, Geoffrey Booth, Gregory Koutmos, the editors, and two referees for useful comments. Financial sup- port for the paper was provided by the Public Affairs Division of the Canadian Embassy under the 1991-92 Faculty Research Grant Program. 193