Asymmetric Volatility in the Foreign Exchange Markets

37 Pages Posted: 29 Aug 2006

See all articles by Jian-Xin Wang

Jian-Xin Wang

University of Technology Sydney; Financial Research Network (FIRN)

Minxian Yang

UNSW Australia Business School, School of Economics

Date Written: August 2006


This paper explores the presence and characteristics of the asymmetric return-volatility relationship (i.e. asymmetric volatility) in bilateral exchange rates and trade weighted indices (TWI). We find evidence of asymmetric volatility in daily realized volatilities of AUD, GBP, and JPY against USD, as well as daily GARCH-estimated volatilities of their TWI. The asymmetry in bilateral exchange rates is weaker than it is in TWI. For a given currency, the asymmetry is stable in one direction and persists over periods of several years. It is driven by the continuous component, not the jump component, of realized volatility. However, for different currencies the asymmetry is in different directions: Volatilities of AUD and GBP increase when they depreciate against USD; but volatility of JPY increases following JPY appreciation. The statistical properties of EUR are quite different from the other currencies. Its returns against USD appear to be normally distributed with no fat tails. Its volatility has much lower short-term persistence. There is no asymmetric volatility in EUR against USD and its TWI. We also document a strong impact from long-run price trend to daily realized volatility. The impact is stronger than past volatilities aggregated at different time intervals. Our findings call for alternative economic explanations for asymmetric volatility in exchange rates.

Keywords: exchange rates, asymmetric volatillity, long memory, trade weighted index, price trend, volatility spillover, volatility jumps

JEL Classification: C22, E44, F31, G15

Suggested Citation

Wang, Jian-Xin and Yang, Minxian, Asymmetric Volatility in the Foreign Exchange Markets (August 2006). Available at SSRN: or

Jian-Xin Wang (Contact Author)

University of Technology Sydney ( email )

UTS Business School
Finance Decipline
Sydney, NSW

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


Minxian Yang

UNSW Australia Business School, School of Economics ( email )

School of Economics
The University of New South Wales
Sydney, NSW NSW 2052
93853353 (Phone)

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