Do Trading Hours Affect Volatility Links in the Foreign Exchange Market?
Posted: 5 May 2012
Date Written: April 4, 2012
This paper explores whether volatility linkages exist at the intra-daily frequency in the foreign exchange market, and whether market trading hours affect volatility transmission. To answer these questions, we apply the Fleming, Kirby and Ostdiek model (1998) to 21 currency pairs using hourly data and allowing specific consideration to be given to the role of which market is open in driving volatility linkages. Our findings indicate that hourly volatility is less persistent than daily volatility. We also find that market trading hours play a different role in driving volatility linkages for major and non-major currencies. For major currency pairs, we find that simultaneous trading hours are not critical for the processing of information flow. However, for the other currency pairings volatility transmission is affected by which markets are open.
Keywords: common information, foreign exchange market, stochastic volatility, trading hours, volatility spillover
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