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A Range-Based Multivariate Stochastic Volatility Model for Exchange Rates

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Author Info

  • Ben Tims
  • Ronald Mahieu

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 decomposes the log range of each exchange rate into two independent latent factors, which could be interpreted as the underlying currency specific components. Owing to the empirical normality of the logarithmic range measure the model can be estimated conveniently with the standard Kalman filter methodology. Our results show that our model fits the exchange rate data quite well. Exchange rate news seems to be currency specific and allows identification of currency contributions to both exchange rate levels and exchange rate volatilities.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/07474930600712814
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 25 (2006)
Issue (Month): 2-3 ()
Pages: 409-424

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Handle: RePEc:taf:emetrv:v:25:y:2006:i:2-3:p:409-424

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Related research

Keywords: Exchange rates; Multivariate stochastic volatility models; Range-based volatility;

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Cited by:
  1. Siddhartha Chib & Yasuhiro Omori & Manabu Asai, 2007. "Multivariate stochastic volatility," CIRJE F-Series CIRJE-F-488, CIRJE, Faculty of Economics, University of Tokyo.
  2. Siddhartha Chib & Yasuhiro Omori & Manabu Asai, 2007. "Multivariate stochastic volatility (Revised in May 2007, Handbook of Financial Time Series (Published in "Handbook of Financial Time Series" (eds T.G. Andersen, R.A. Davis, Jens-Peter Kreiss," CARF F-Series CARF-F-094, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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