What drives volatility persistence in the foreign exchange market?

David Berger, Alain Chaboud and Erik Hjalmarsson

Journal of Financial Economics, 2009, vol. 94, issue 2, 192-213

Abstract: We propose a new empirical specification of volatility that links volatility to the information flow, measured as the order flow in the market, and to the price sensitivity to that information. The time-varying market sensitivity to information is estimated from high-frequency data, and movements in volatility can therefore be directly related to movements in order flow and market sensitivity. Empirically, the model explains a large share of the long-run variation in volatility. Importantly, the time variation in the market's sensitivity to information is at least as relevant in explaining the persistence of volatility as the rate of information arrival itself. This may be evidence of a link between changes over time in the aggregate behavior of market participants and the time-series properties of realized volatility.

Keywords: Volatility; persistence; High-frequency; data; Realized; volatility; Long; memory; Exchange; rates (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (58)

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Working Paper: What drives volatility persistence in the foreign exchange market? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:94:y:2009:i:2:p:192-213

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