The distribution of realized exchange rate volatility

Torben G. Andersen*, Tim Bollerslev, Francis X. Diebold, Paul Labys

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

973 Scopus citations

Abstract

Using high-frequency data on deutschemark and yen returns against the dollar, we construct model-free estimates of daily exchange rate volatility and correlation that cover an entire decade. Our estimates, termed realized volatilities and correlations, are not only model-free, but also approximately free of measurement error under general conditions, which we discuss in detail. Hence, for practical purposes, we may treat the exchange rate volatilities and correlations as observed rather than latent. We do so, and we characterize their joint distribution, both unconditionally and conditionally. Noteworthy results include a simple normality-inducing volatility transformation, high contemporaneous correlation across volatilities, high correlation between correlation and volatilities, pronounced and persistent dynamics in volatilities and correlations, evidence of long-memory dynamics in volatilities and correlations, and remarkably precise scaling laws under temporal aggregation.

Original languageEnglish (US)
Pages (from-to)42-55
Number of pages14
JournalJournal of the American Statistical Association
Volume96
Issue number453
DOIs
StatePublished - Mar 1 2001

Keywords

  • Forecasting
  • High-frequency data
  • Integrated volatility
  • Long-memory
  • Quadratic variation
  • Realized volatility
  • Risk management

ASJC Scopus subject areas

  • Statistics and Probability
  • Statistics, Probability and Uncertainty

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