The Incremental Volatility Information in One Million Foreign Exchange Quotations

Posted: 5 Sep 2001  

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance

Xinzhong Xu

Peking University - Guanghua School of Management

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Abstract

The volatility information contained in high-frequency exchange rate quotations and in implied volatilities calculated from options prices is compared by estimating ARCH models for hourly and daily DM/$ returns. The results are based on the year of Reuters quotations supplied by Olsen & Associates. These quotations are used to calculate five-minute returns and hence hourly and daily estimates of realised volatility that can be included in equations for the conditional variances of hourly and daily returns. The ARCH results show that there is a significant amount of information in five-minute returns that is incremental to the options information when estimating hourly variances. The same conclusion is obtained by an out-of-sample comparison of forecasts of hourly realised volatility.

JEL Classification: C32, C53, F31, G15

Suggested Citation

Taylor, Stephen J. and Xu, Xinzhong, The Incremental Volatility Information in One Million Foreign Exchange Quotations. Journal of Empirical Finance, Vol. 4, pp. 317-340, 1997. Available at SSRN: https://ssrn.com/abstract=282454

Stephen J. Taylor (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 15 24 59 36 24 (Phone)
+ 44 15 24 84 73 21 (Fax)

HOME PAGE: http://www.lancs.ac.uk/staff/afasjt

Gary Xinzhong Xu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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