A Range-Based Multivariate Model for Exchange Rate Volatility

Ben Tims and Ronald Mahieu

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: In this paper we present a parsimonious multivariate model for exchange rate volatilities based on logarithmic high-low ranges of daily exchange rates. The multivariate stochastic volatility model divides the log range of each exchange rate into two independent latent factors, which are interpreted as the underlying currency specific components. Due to the normality of logarithmic volatilities the model can be estimated conveniently with standard Kalman filter techniques. Our results show that our model fits the exchange rate data quite well. Exchange rate news seems to be very currency-specific and allows us to identify which currency contributes most to both exchange rate levels and exchange rate volatilities.

Keywords: exchange rates; multivariate stochastic volatility models; range-based volatility (search for similar items in EconPapers)
JEL-codes: C51 F31 G15 G3 M M41 (search for similar items in EconPapers)
Date: 2003-03-10
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:282

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