How Large is Excess Volatility of the EUR/USD Exchange Rate? Evidence from a GAS Approach

Leonardo Bargigli

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: Using a novel Generalized Autoregressive Score (GAS) methodology applied to EUR/USD high-frequency interdealer data on price variations and net demand in 2016, this paper provides evidence of a substantial violation of market efficiency in the foreign exchange market. The analysis shows that endogenous factors amplified efficient price fluctuations by at least 46\% on average, underscoring the importance of informational asymmetry and feedback trading in exchange rate dynamics. The key implication is that excess volatility of the EUR/USD exchange rate is not only sizeable but also structural, as it arises from mechanisms intrinsic to market functioning.

Keywords: excess volatility; foreign exchange; high frequency data; score-driven model; GARCH; SVAR. (search for similar items in EconPapers)
JEL-codes: C32 C58 F31 G14 (search for similar items in EconPapers)
Pages: 528 pages
Date: 2025
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