Exchange Rate Volatility and the Mixture of Distribution Hypothesis
31 Pages Posted: 14 Apr 2005
Date Written: January 30, 2005
This paper sheds new light on the mixture of distribution hypothesis by means of a study of the exchange rate volatility of the Norwegian krone. First, we find that the impact of changes in the number of information events on exchange rate volatility is statistically significant, and recursive parameter analysis suggests the impact is relatively stable across three different exchange rate regimes. Second, our results do not support the hypothesis that an increase in the number of traders reduces exchange rate volatility. Finally, we report a case in which undesirable residual properties attained within traditional frameworks are easily removed by applying the log-transformation on volatilities.
Keywords: Exchange rate volatility, log-linear analysis, mixture of distribution hypothesis
JEL Classification: F31
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