Which continuous-time model is most appropriate for exchange rates?

Deniz Erdemlioglu, Sébastien Laurent and Christopher Neely

No 2013-024, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper attempts to realistically model the underlying exchange rate data generating process. We ask what types of diffusion or jump features are most appropriate. The most plausible model for 1-minute data features Brownian motion and Poisson jumps but not infinite activity jumps. Modeling periodic volatility is necessary to accurately identify the frequency of jump occurrences and their locations. We propose a two-stage method to capture the effects of these periodic volatility patterns. Simulations show that microstructure noise does not significantly impair the statistical tests for jumps and diffusion behavior.>

Keywords: Foreign exchange; time series analysis (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ecm, nep-mon and nep-mst
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Citations: View citations in EconPapers (1)

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Journal Article: Which continuous-time model is most appropriate for exchange rates? (2015)
Working Paper: Which continuous-time model is most appropriate for exchange rates? (2015)
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DOI: 10.20955/wp.2013.024

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