A cyclical model of exchange rate volatility

Richard Harris, Evarist Stoja and Fatih Yilmaz

Journal of Banking & Finance, 2011, vol. 35, issue 11, 3055-3064

Abstract: In this paper, we investigate the long run dynamics of the intraday range of the GBP/USD, JPY/USD and CHF/USD exchange rates. We use a non-parametric filter to extract the low frequency component of the intraday range, and model the cyclical deviation of the range from the long run trend as a stationary autoregressive process. We use the cyclical volatility model to generate out-of-sample forecasts of exchange rate volatility for horizons of up to 1Â year under the assumption that the long run trend is fully persistent. As a benchmark, we compare the forecasts of the cyclical volatility model with those of the range-based EGARCH and FIEGARCH models of Brandt and Jones (2006). Not only does the cyclical volatility model provide a very substantial computational advantage over the EGARCH and FIEGARCH models, but it also offers an improvement in out-of-sample forecast performance.

Keywords: Conditional; volatility; Intraday; range; Non-parametric; filter (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: A Cyclical Model of Exchange Rate Volatility (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:11:p:3055-3064

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