On asymmetric volatility effects in currency markets

Dooyeon Cho and Seunghwa Rho ()
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Seunghwa Rho: Emory University

Empirical Economics, 2022, vol. 62, issue 5, No 4, 2149-2177

Abstract: Abstract This paper investigates the asymmetric effects of exchange rate volatility in currency markets using high-frequency, intraday data of the most actively traded currencies over 2004–2017. The analysis is conducted by combining the quantile regression model with the heterogeneous autoregressive (HAR) model and its extensions where realized variance is decomposed into positive and negative semivariances. We find that safe haven currencies exhibit behavior different from that of other currencies. For safe haven currencies, negative realized semivariance associated with appreciation plays an important role in explaining the quantile-dependent volatility dynamics. This behavior is more pronounced during high volatility phases. The opposite holds for other currencies, i.e., positive realized semivariance associated with depreciation matters more. The results also reveal that while negative jumps associated with the appreciation of safe haven currencies lead to higher future volatility, positive jumps associated with the depreciation of other currencies lead to higher future volatility, especially during high volatility phases. We formally test whether the volatility dynamics are quantile dependent.

Keywords: Realized volatility; Carry trade; Semivariance; Asymmetric volatility; Quantile HAR (search for similar items in EconPapers)
JEL-codes: C32 F31 G15 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00181-021-02091-7

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