Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market

28 Pages Posted: 18 Jun 2004  

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Takatoshi Ito

University of Tokyo - Faculty of Economics; National Bureau of Economic Research (NBER); Ministry of Finance, Tokyo

Wenling Lin

Office of Comptroller of Currency

Date Written: June 1988

Abstract

This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCII models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.

Suggested Citation

Engle, Robert F. and Ito, Takatoshi and Lin, Wenling, Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market (June 1988). NBER Working Paper No. w2609. Available at SSRN: https://ssrn.com/abstract=428353

Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
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National Bureau of Economic Research (NBER)

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Takatoshi Ito

University of Tokyo - Faculty of Economics ( email )

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Tokyo 113-0033
Japan

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States
81-425-80-8356 (Phone)
81-425-80-8333 (Fax)

Ministry of Finance, Tokyo ( email )

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100-8940 Tokyo
Japan
+81-3-3581-4720 (Phone)
+81-3-5251-2144 (Fax)

Wenling Lin

Office of Comptroller of Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

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