Econometric Modeling of Exchange Rate Volatility and Jumps
University of Namur - FUNDP
Maastricht University - Department of Quantitative Economics
Christopher J. Neely
Federal Reserve Bank of St. Louis - Research Division
April 11, 2012
Federal Reserve Bank of St. Louis Working Paper No. 2012-008A
This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades. Academic researchers have sought to fit the three major characteristics of foreign exchange volatility: intraday periodicity, autocorrelation and discontinuities in prices. Early research modeled the autocorrelation in daily and weekly squared foreign exchange returns with ARCH/GARCH models. Increased computing power and availability of high-frequency data allowed later researchers to improve volatility and jumps estimates. Researchers also found it useful to incorporate information about periodic volatility patterns and macroeconomic announcements in their calculations. This article details these volatility and jump estimation methods, compares those methods empirically and provides some suggestions for further research.
Number of Pages in PDF File: 69
Keywords: Foreign exchange volatility, ARCH models, realized volatility, intraday periodicity, jumps, macroeconomic announcements, central bank interventions
JEL Classification: C13, C14, C58, F31working papers series
Date posted: April 12, 2012
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