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FX market volatility modelling: Can we use low-frequency data?

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  • Lyócsa, Štefan
  • Plíhal, Tomáš
  • Výrost, Tomáš

Abstract

High-frequency data tend to be costly, subject to microstructure noise, difficult to manage, and lead to high computational costs. Is it always worth the extra effort? We compare the forecasting accuracy of low- and high-frequency volatility models on the market of six major foreign exchange market (FX) pairs. Our results indicate that for short-forecast horizons, high-frequency models dominate their low-frequency counterparts, particularly in periods of increased volatility. With an increased forecast horizon, low-frequency volatility models become competitive, suggesting that if high-frequency data are not available, low-frequency data can be used to estimate and predict long-term volatility in FX markets.

Suggested Citation

  • Lyócsa, Štefan & Plíhal, Tomáš & Výrost, Tomáš, 2021. "FX market volatility modelling: Can we use low-frequency data?," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320315907
    DOI: 10.1016/j.frl.2020.101776
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