Endogenous Volatility in the Foreign Exchange Market

Leonardo Bargigli and Giulio Cifarelli

Journal of Financial Econometrics, 2024, vol. 22, issue 4, 773-807

Abstract: We study two sources of heteroscedasticity in high-frequency financial data and estimate their contribution to overall volatility by means of a Markov switching (MS) structural VAR model. We achieve identification for all coefficients by assuming that the structural errors follow a GARCH-DCC process. Using transaction data of the EUR/USD interdealer market in 2016, we first detect three regimesof volatility. Then we show that both sources of volatility matter for the transmission of shocks, and that information is channeled to the market mostly through demand shocks. This suggests that, on the EUR/USD market, some liquidity takers (LTs) are better informed than both liquidity providers and those LTs who follow a feedback strategy.

Keywords: foreign exchange market; GARCH; heteroscedasticity; high-frequency data; Markov switching; SVAR (search for similar items in EconPapers)
JEL-codes: C32 C55 D84 F31 G12 (search for similar items in EconPapers)
Date: 2024
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