Transitory and permanent components of exchange rate volatility: Further evidence from causality tests

We present new evidence on the volatility behaviour of major exchange rates, focusing on their permanent (long-run) and transitory (short-run) components. To achieve this, we conduct a causality analysis to explore their statistical relationship and identify their mutual influences. Our findings indicate that shocks to economic fundamentals (which correspond to the permanent volatility component) and market sentiment (associated with the transitory volatility component) reinforce one another, transmitting and intensifying tensions on a global scale, thus creating a complex and tightly interconnected network.