The Temporal Aggregation Effect on the Predictability of Exchange Rate Volatility

Keun Yeong Lee
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Keun Yeong Lee: National Intelligence Educational and Research Institute

Korean Economic Review, 1997, vol. 13, issue 1, 103-126

Abstract: The temporal aggregation eï¬ fect on autocorrelation functions for the squares of exchange rate changes is theoretically and empirically analyzed. As thedata frequency decreases, autocorrelation functions converge to zero. The paper also compares weighting schemes and out-of-sample performances of several competing models - GARCH(1, 1), homoskedastic, kernel, flat rolling regressions, and Foster and Nelson’s weighted rolling regressions models. Temporal aggregation generally aggravates out-of-sample performances of GARCH(1,1) models and weighted rolling regressions, compared with other models. Low-frequency GARCH(I, I) models derived from high-frequency GARCH(1, 1) models are not worse than direct low-frequency GARCH(1, 1) models.

Date: 1997
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