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Volatility Regimes and the Relationship between Volatility, Trading Volume, and Spreads in the FX market (in Korean)

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  • Beum-Jo Park

    (Department of Economics, Dankook University)

Abstract

This paper analyzes the factors of volatility in the foreign exchange market within a microstructure framework. Unlike the existing literature, it proposes that the relationship between volatility, trading volume, and bid-ask spreads shift owing to the volatility regime switching caused by big news or psychological factors such as herd behavior; and further their relationship is also influenced by quantiles of a volatility distribution. To verify the proposition empirically, this paper calculates realized volatility and then estimates a threshold quantile autoregressive model. Using the daily closing spot prices for the won/dollar currency pair, we find significant nonlinearities in volatility dynamics characterized by two regimes and quantile processes. In particular, in contrast with the mixture of distribution hypothesis, volatility is negatively related to volume and weakly to spreads under an unstable regime stemming from noisy(or speculative) trading.

Suggested Citation

  • Beum-Jo Park, 2013. "Volatility Regimes and the Relationship between Volatility, Trading Volume, and Spreads in the FX market (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 19(2), pages 1-23, June.
    • Handle: RePEc:bok:journl:v:19:y:2013:i:2:p:1-23
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    More about this item

    Keywords

    Volatility regime; Trading volume; Bid-ask spreads; Realized volatility; Threshold quantile autoregressive models;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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