Sources of volatility persistence: A case study of the U.K. pound/U.S. dollar exchange rate returns

► Volatility persistence and leverage effects associated with the U.K. pound/U.S. dollar exchange rate returns are jointly tested by means of a Wald Chi-square test. ► A regime switching threshold generalized autoregressive conditional heteroskedasticity (RS-TGARCH) mode is used to evaluate the monthly data. ► A fractional generalized autoregressive conditional heteroskedasticity (RS-TFIGARCH) model is used on the daily returns data. ► The RS-TGARCH model is found to be adequate in analyzing the first two moments of the monthly exchange rate returns series. ► The RS-TFIGARCH is found to be adequate for the daily data. This paper utilizes a new approach to examine the inherent nonlinear dynamics of the exchange rate returns volatility. Specifically, we utilize a regime switching threshold (i) generalized autoregressive conditional heteroskedasticity (RS-TGARCH) and (ii) a fractional generalized autoregressive conditional heteroskedasticity (RS-TFIGARCH) model. The RS-TGARCH model is found to be adequate in analyzing the first two moments of the U.K. pound/U.S. dollar monthly exchange rate returns series. The RS-TFIGARCH is found to be adequate for the daily returns series. The volatility persistence and leverage effects associated with exchange rate returns series are jointly tested by means of a Wald Chi-square test.