Norwegian petroleum taxation and its effect on conditional variance in the Norwegian krone : evidence from the Norwegian krone - U.S. dollar market

Abstract

The principles of Norwegian petroleum taxation create a loop of excessive currency exchange operations. Petroleum firms operating on the Norwegian shelf is obligated to pay tax in Norwegian krone. The government petroleum tax revenue is partly used to cover the non-oil national budget and partly invested in the Norwegian Government Pension Fund Global. Through monthly announcements, Norges Bank discloses how much foreign currency they plan to buy. This paper aims to analyse to what extent, if any, the volatility increases on those particular days. Several models are specified to explain the daily percentage change and the conditional variance in the Norwegian krone – U.S. dollar market over the period 29th of March, 2001 to 6th of May, 2013. Our findings indicate that the conditional variance was affected positively on announcement days prior to 1st of August, 2008. The econometric approach involves ordinary least squares, weighted least squares and several models from the general autoregressive conditional heteroskedasticity family.