The Incremental Volatility Information in One Million Foreign Exchange Quotations
Stephen J. Taylor
Lancaster University - Department of Accounting and Finance
Peking University - Guang Hua School of Management
Journal of Empirical Finance, Vol. 4, pp. 317-340, 1997
The volatility information contained in high-frequency exchange rate quotations and in implied volatilities calculated from options prices is compared by estimating ARCH models for hourly and daily DM/$ returns. The results are based on the year of Reuters quotations supplied by Olsen & Associates. These quotations are used to calculate five-minute returns and hence hourly and daily estimates of realised volatility that can be included in equations for the conditional variances of hourly and daily returns. The ARCH results show that there is a significant amount of information in five-minute returns that is incremental to the options information when estimating hourly variances. The same conclusion is obtained by an out-of-sample comparison of forecasts of hourly realised volatility.
JEL Classification: C32, C53, F31, G15Accepted Paper Series
Date posted: September 5, 2001
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