Volatility Regimes and the Relationship between Volatility, Trading Volume, and Spreads in the FX market (in Korean)

Beum Jo Park ()

Economic Analysis (Quarterly), 2013, vol. 19, issue 2, 1-23

Abstract: This paper analyzes the factors of volatility in the foreign exchange market within a microstructure framework. Unlike the existing literature, it proposes that the relationship between volatility, trading volume, and bid-ask spreads shift owing to the volatility regime switching caused by big news or psychological factors such as herd behavior; and further their relationship is also influenced by quantiles of a volatility distribution. To verify the proposition empirically, this paper calculates realized volatility and then estimates a threshold quantile autoregressive model. Using the daily closing spot prices for the won/dollar currency pair, we find significant nonlinearities in volatility dynamics characterized by two regimes and quantile processes. In particular, in contrast with the mixture of distribution hypothesis, volatility is negatively related to volume and weakly to spreads under an unstable regime stemming from noisy(or speculative) trading.

Keywords: Volatility regime; Trading volume; Bid-ask spreads; Realized volatility; Threshold quantile autoregressive models (search for similar items in EconPapers)
JEL-codes: C22 C51 F31 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:bok:journl:v:19:y:2013:i:2:p:1-23

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