Research on the Volatility Relationship Between Exchange Rates and Interest Rates in International Financial Markets:Based on the DCC-GARCH Model

Yanyan Dong

doi:10.47297/wspdecWSP2515-797306.20250906

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Research on the Volatility Relationship Between Exchange Rates and Interest Rates in International Financial Markets:Based on the DCC-GARCH Model

Volume 9, Issue 6

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Research on the Volatility Relationship Between Exchange Rates and Interest Rates in International Financial Markets:Based on the DCC-GARCH Model
Research on the Volatility Relationship Between Exchange Rates and Interest Rates in International Financial Markets:Based on the DCC-GARCH Model
Shandong University of Science and Technology, Jinan, Shandong, 250000, China
Vol. 9, Issue 6, Pages: 29-36(2025)
Published：30 June 2025
DOI：10.47297/wspdecWSP2515-797306.20250906
Accepted：

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Dong Yanyan.Research on the Volatility Relationship Between Exchange Rates and Interest Rates in International Financial Markets:Based on the DCC-GARCH Model[J].Development Economics of China,2025,09(06):29-36.
DOI：

Dong Yanyan.Research on the Volatility Relationship Between Exchange Rates and Interest Rates in International Financial Markets:Based on the DCC-GARCH Model[J].Development Economics of China,2025,09(06):29-36. DOI： 10.47297/wspdecWSP2515-797306.20250906.

摘要

Abstract

This study focuses on the volatility relationship between exchange rates and interest rates in international financial markets. Utilizing the DCC-GARCH model

it explores their dynamic linkage mechanisms and volatility spillover effects against the backdrop of globalization. By analyzing daily data (2015-2025) on major currency exchange rates (USD

EUR

JPY) and corresponding national benchmark interest rates

combined with an improved DCC-GARCH methodology (incorporating multivariate t-distribution and Markov regime-switching)

the study reveals the time-varying correlation and asymmetric characteristics of exchange rates and interest rates during crisis events (such as the COVID-19 pandemic and the Fed's interest rate hike cycle). The findings indicate that the linkage between exchange rates and interest rates significantly strengthens during monetary policy tightening periods

and there exists a unidirectional volatility spillover effect from developed markets to emerging markets. This research overcomes the limitations of traditional static models

providing a dynamic quantitative basis for multinational corporations' foreign exchange risk management

central bank policy coordination

and the construction of a global financial safety net. It verifies the driving role of market sentiment and policy expectations on dynamic correlations and proposes a "dual-pillar" policy framework to address the risks of spiraling exchange rate and interest rate volatility.

关键词

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references

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