Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
University of Tokyo - Faculty of Economics; National Bureau of Economic Research (NBER); Ministry of Finance, Tokyo
Office of Comptroller of Currency
NBER Working Paper No. w2609
This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCII models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.
Number of Pages in PDF File: 28working papers series
Date posted: June 18, 2004
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