A Range-Based Multivariate Model for Exchange Rate Volatility

33 Pages Posted: 28 Feb 2008

See all articles by Ben Tims

Ben Tims

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Ronald Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School

Date Written: October 2003 3,

Abstract

In this paper we present a parsimonious multivariate model forexchange rate volatilities based on logarithmic high-low ranges ofdaily exchange rates. The multivariate stochastic volatility modeldivides the log range of each exchange rate into two independentlatent factors, which are interpreted as the underlying currencyspecific components. Due to the normality of logarithmic volatilitiesthe model can be estimated conveniently with standard Kalman filtertechniques. Our results show that our model fits the exchange ratedata quite well. Exchange rate news seems to be very currency-specificand allows us to identify which currency contributes most to bothexchange rate levels and exchange rate volatilities.

Keywords: multivariate stochastic volatility models, range-based volatility, exchange rates

JEL Classification: M, M41, G3, C51, G15, F31

Suggested Citation

Tims, Ben and Mahieu, Ronald J., A Range-Based Multivariate Model for Exchange Rate Volatility (October 2003 3,). ERIM Report Series Reference No. ERS-2003-022-F&A. Available at SSRN: https://ssrn.com/abstract=1098526

Ben Tims (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Ronald J. Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2430 (Phone)
+31 13 466 3280 (Fax)

HOME PAGE: http://center.uvt.nl/staff/mahieu/

TiasNimbas Business School ( email )

Warandelaan 2
Tilburg, North-Brabant 5071HS
Netherlands

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