Capital Flows and Japanese Asset Volatility
Federal Reserve Bank of St. Louis Working Paper No. 2011-034B
37 Pages Posted: 12 Apr 2012
Date Written: December 22, 2011
Characterizing asset price volatility is an important goal for financial economists. The literature has shown that variables that proxy for the information arrival process can help explain and/or forecast volatility. Unfortunately, however, obtaining good measures of volume and/or order flow is expensive or difficult in decentralized markets such as foreign exchange. We investigate the extent that Japanese capital flows — which are released weekly — reflect information arrival that improves foreign exchange and equity volatility forecasts. We find that capital flows can help explain transitory shocks to GARCH volatility.
Keywords: volatility, capital flows, GARCH, exchange rates
JEL Classification: F31, F32
Suggested Citation: Suggested Citation