The Distribution of Exchange Rate Volatility
30 Pages Posted: 11 Nov 2008
There are 2 versions of this paper
The Distribution of Exchange Rate Volatility
The Distribution of Exchange Rate Volatility
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
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