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I am trying to measure exchange rate volatility in some countries and I am using their currencies against euro. Problem is that one of them is Slovakia which has changed the currency in 2009 from crown to euro. From that year there is no way for me to measure its exchange rate against euro, because it is using euro (obviously). How would you suggest to solve this issue in the most correct way?

Approach I think of is comparing Slovakia currency for the whole time period against USD, but I am afraid this might introduce another problems (inaccuracies?) into my results. Also, if I do so, should I measure the other countries against USD and not EUR as well?

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    $\begingroup$ There is no reasonable way to estimate a non-existent exchange rate. You can take Slovakia out of the sample. $\endgroup$
    – emcor
    Commented Aug 23, 2015 at 10:31

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The volatility goes to 0 once the crown is pegged to the Euro.

The value of an exchange rate between Currency1 and Currency2 the the ratio of the value of Currency1/Currency2. The realized volatility of a currency pair is the usually measured as some trailing average of the daily log-changes in this ratio.

After the conversion was made the crown at a ratio of 30.1260 crowns to 1 Euro, this ratio hasn't changed and therefore the exchanged rate is fixed. The volatility of a constant series is 0.

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I am not sure what the purpose of your volatility calculation is. So, frankly, the question does not make 100% sense to me.

However, countries do not engage in trade with just one other country but with many, so from an International Trade Theory point of view looking at a single bi-lateral rate (even an important one like SLOVAKIA/EUR) is not enough. Slovakia no longer experiences currency fluctuations with its eurozone partners, but it still trades (presumably) with USA, China, etc. So you should consider looking at an Effective Exchange Rate for Slovakia. EER's are computed by central banks or national statistics institutes by a mathematical formula that essentially averages together many bilateral exchange rates in proportion to how much the country trades with those countries. [In fact they are sometimes called trade weighted exchange rates].

Hope this helps.

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