The Distribution of Exchange Rate Volatility

Torben Andersen, Tim Bollerslev, Francis Diebold and Paul Labys

New York University, Leonard N. Stern School Finance Department Working Paper Seires from New York University, Leonard N. Stern School of Business-

Abstract: Using high-frequency data on Deutschemark and Yen returns against the dollar, we construct model-free estimates of daily exchange rate volatility and correlation, covering an entire decade. In addition to being model-free, our estimates are also approximately free of measurement error under general conditions, which we delineate. Hence, for all practical purposes, we can treat the exchange rate volatilities and correlations as observed rather than latent. We do so, and we characterize their joint distribution, both unconditionally and conditionally. Noteworthy results include a simple normality-inducing volatility transformation, high contemporaneous correlation across volatilities, high correlation between correlation and volatilities, pronounced and highly persistent temporal variation in both volatilities and correlation, clear evidence of long-memory dynamics in both volatilities and correlation, and remarkably precise scaling laws under temporal aggregation.

Date: 1999-11-02
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Citations: View citations in EconPapers (89)

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Related works:
Working Paper: The Distribution of Exchange Rate Volatility (1999)
Working Paper: The Distribution of Exchange Rate Volatility (1999)
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