Volatility Spillovers between the Black Market and Official Market for Foreign Currency in Greece

The issue of volatility spillovers between the black and official exchange markets for U. S. dollars in Greece for 1975-89 is examined. A vector error correction-bivariate EGARCH model is developed and estimated to capture potential asymmetric effects of innovations and volatility. During the period under investigation, reciprocal spillovers are found between the black and official exchange markets for dollars. Furthermore, spillovers are asymmetric in that bad news in one market has a greater effect on the volatility of the other market than good news. Additionally, the size of spillover effects is greater from the official market to the black market. Finally, the removal of the foreign exchange controls in January 1986 made the volatility of the official exchange rate higher and changed the nature of volatility spillovers between the two markets.