The Distribution of Exchange Rate Volatility

30 Pages Posted: 11 Nov 2008

See all articles by Torben G. Andersen

Torben G. Andersen

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Aarhus University - CREATES

Tim Bollerslev

Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Paul Labys

Charles River Associates (CRA) - Utah Office

Multiple version iconThere are 2 versions of this paper

Date Written: November 1999

Abstract

Using high-frequency data on Deutschemark and Yen returns against the dollar, we construct model-free estimates of daily exchange rate volatility and correlation, covering an entire decade. In addition to being model-free, our estimates are also approximately free of measurement error under general conditions, which we delineate. Hence, for all practical purposes, we can treat the exchange rate volatilities and correlations as observed rather than latent. We do so, and we characterize their joint distribution, both unconditionally and conditionally. Noteworthy results include a simple normality-inducing volatility transformation, high contemporaneous correlation across volatilities, high correlation between correlation and volatilities, pronounced and highly persistent temporal variation in both volatilities and correlation, clear evidence of long-memory dynamics in both volatilities and correlation, and remarkably precise scaling laws under temporal aggregation.

Keywords: Financial Market Volatility, High-Frequency Data, Realized Volatility, Quadratic Variation, Exchange Rates, Long-Memory

Suggested Citation

Andersen, Torben G. and Bollerslev, Tim and Diebold, Francis X. and Labys, Paul, The Distribution of Exchange Rate Volatility (November 1999). NYU Working Paper No. FIN-99-059. Available at SSRN: https://ssrn.com/abstract=1298332

Torben G. Andersen (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
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National Bureau of Economic Research (NBER) ( email )

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Aarhus University - CREATES ( email )

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Tim Bollerslev

Duke University - Finance ( email )

Durham, NC 27708-0120
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Duke University - Department of Economics

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National Bureau of Economic Research (NBER)

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Francis X. Diebold

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul Labys

Charles River Associates (CRA) - Utah Office ( email )

170 South Main St., Suite 500
Salt Lake City, UT 84101
United States
801.536.1511 (Phone)
801.536.1501 (Fax)

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