Econometric Modeling of Exchange Rate Volatility and Jumps

Federal Reserve Bank of St. Louis Working Paper No. 2012-008A

69 Pages Posted: 12 Apr 2012

See all articles by Deniz Erdemlioglu

Deniz Erdemlioglu

IESEG School of Management, LEM-CNRS 9221, France

Sébastien Laurent

AMSE

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Date Written: April 11, 2012

Abstract

This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades. Academic researchers have sought to fit the three major characteristics of foreign exchange volatility: intraday periodicity, autocorrelation and discontinuities in prices. Early research modeled the autocorrelation in daily and weekly squared foreign exchange returns with ARCH/GARCH models. Increased computing power and availability of high-frequency data allowed later researchers to improve volatility and jumps estimates. Researchers also found it useful to incorporate information about periodic volatility patterns and macroeconomic announcements in their calculations. This article details these volatility and jump estimation methods, compares those methods empirically and provides some suggestions for further research.

Keywords: Foreign exchange volatility, ARCH models, realized volatility, intraday periodicity, jumps, macroeconomic announcements, central bank interventions

JEL Classification: C13, C14, C58, F31

Suggested Citation

Erdemlioglu, Deniz and Laurent, Sébastien and Neely, Christopher J., Econometric Modeling of Exchange Rate Volatility and Jumps (April 11, 2012). Federal Reserve Bank of St. Louis Working Paper No. 2012-008A, Available at SSRN: https://ssrn.com/abstract=2038581 or http://dx.doi.org/10.2139/ssrn.2038581

Deniz Erdemlioglu

IESEG School of Management, LEM-CNRS 9221, France ( email )

3 rue de la Digue
Lille, 59000
France

HOME PAGE: http://www.denizerdemlioglu.com

Sébastien Laurent

AMSE ( email )

2 rue de la Charité
Marseille, 13236
France

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

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