What drives volatility persistence in the foreign exchange market?

David Berger, Alain Chaboud, Erik Hjalmarsson*

*Corresponding author for this work

Research output: Contribution to journalArticle

40 Scopus citations

Abstract

We propose a new empirical specification of volatility that links volatility to the information flow, measured as the order flow in the market, and to the price sensitivity to that information. The time-varying market sensitivity to information is estimated from high-frequency data, and movements in volatility can therefore be directly related to movements in order flow and market sensitivity. Empirically, the model explains a large share of the long-run variation in volatility. Importantly, the time variation in the market's sensitivity to information is at least as relevant in explaining the persistence of volatility as the rate of information arrival itself. This may be evidence of a link between changes over time in the aggregate behavior of market participants and the time-series properties of realized volatility.

Original languageEnglish (US)
Pages (from-to)192-213
Number of pages22
JournalJournal of Financial Economics
Volume94
Issue number2
DOIs
StatePublished - Nov 1 2009

Keywords

  • Exchange rates
  • High-frequency data
  • Long memory
  • Realized volatility
  • Volatility persistence

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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