The Distribution of Exchange Rate Volatility

49 Pages Posted: 23 Jun 1999 Last revised: 9 Jan 2022

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: February 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 remarkably precise scaling laws under temporal aggregation.

Suggested Citation

Andersen, Torben G. and Bollerslev, Tim and Diebold, Francis X. and Labys, Paul, The Distribution of Exchange Rate Volatility (February 1999). NBER Working Paper No. w6961, Available at SSRN: https://ssrn.com/abstract=150857

Torben G. Andersen (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Tim Bollerslev

Duke University - Finance ( email )

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Francis X. Diebold

University of Pennsylvania - Department of Economics ( email )

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

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Paul Labys

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