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Exchange rate volatility and the mixture of distribution hypothesis

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  • BAUWENS, Luc
  • RIME, Dagfinn
  • SUCARRAT, Genaro

Abstract

This paper sheds new light on the mixture of distribution hypothesis by means of a study of the weekly exchange rate volatility of the Norwegian krone. In line with other studies we find that the impact of information arrival on exchange rate volatility is positive and statistically significant, and that the hypothesis that an increase in the number of traders reduces exchange rate volatility is not supported. The novelties of our study consist in documenting that the positive impact of information arrival on volatility is relatively stable across three different exchange rate regimes, and in that the impact is relatively similar for both weekly volatility and weekly realised volatility. It is not given that the former should be the case since exchange rate stabilisation was actively pursued by the central bank in parts of the study period. We also report a case in which undesirable residual properties attained within traditional frameworks are easily removed by applying the log-transformation on volatilities.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005058.

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Date of creation: 00 Sep 2005
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Handle: RePEc:cor:louvco:2005058

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Keywords: exchange rate volatility; log-linear analysis; mixture of distribution hypothesis;

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References

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  1. Geir H. Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2002. "Volume and Volatility in the FX-Market: Does it matter who you are?," CESifo Working Paper Series 786, CESifo Group Munich.
  2. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
  3. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
  4. BAUWENS, Luc & BEN OMRANE, Walid & GIOT, Pierre, . "News announcements, market activity and volatility in the euro/dollar foreign exchange market," CORE Discussion Papers RP -1787, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Akram, Q.F., 2000. "When does the Oil Price Affect the Norwegian Exchange Rate?," Economics Series Working Papers 9931, University of Oxford, Department of Economics.
  6. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  7. Gabriele Galati, 2000. "Trading volumes, volatility and spreads in foreign exchange markets: evidence from emerging market countries," BIS Working Papers 93, Bank for International Settlements.
  8. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  9. Gilbert, Christopher L, 1986. "Professor Hendry's Econometric Methodology," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 283-307, August.
  10. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  11. Grammatikos, Theoharry & Saunders, Anthony, 1986. "Futures Price Variability: A Test of Maturity and Volume Effects," The Journal of Business, University of Chicago Press, vol. 59(2), pages 319-30, April.
  12. Bollerslev, Tim & Domowitz, Ian, 1993. " Trading Patterns and Prices in the Interbank Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 48(4), pages 1421-43, September.
  13. Goodhart, C. A. E. & Figliuoli, L., 1991. "Every minute counts in financial markets," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 23-52, March.
  14. Bessembinder, Hendrik & Seguin, Paul J, 1992. " Futures-Trading Activity and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 47(5), pages 2015-34, December.
  15. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
  16. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. GIOT, Pierre, 2003. "The Asian financial crisis : the start of a regime switch in volatility," CORE Discussion Papers 2003078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  18. Melvin, Michael & Yin, Xixi, 2000. "Public Information Arrival, Exchange Rate Volatility, and Quote Frequency," Economic Journal, Royal Economic Society, vol. 110(465), pages 644-61, July.
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Citations

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Cited by:
  1. Luc Bauwens & Genaro Sucarrat, 2008. "General to specific modelling of exchange rate volatility : a forecast evaluation," Economics Working Papers we081810, Universidad Carlos III, Departamento de Economía.
  2. Mougoué, Mbodja & Aggarwal, Raj, 2011. "Trading volume and exchange rate volatility: Evidence for the sequential arrival of information hypothesis," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2690-2703, October.
  3. repec:imd:wpaper:wp2010-25 is not listed on IDEAS
  4. Dick van Dijk & Haris Munandar & Christian Hafner, 2011. "The euro introduction and noneuro currencies," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 95-116.
  5. Dagfinn Rime & Genaro Sucarrat, 2007. "Exchange rate variability, market activity and heterogeneity," Economics Working Papers we077039, Universidad Carlos III, Departamento de Economía.
  6. Dick van Dijk & Haris Munandar & Christian M. Hafner, 2005. "The Euro Introduction and Non-Euro Currencies," Tinbergen Institute Discussion Papers 05-044/4, Tinbergen Institute, revised 08 Jun 2006.
  7. Olivier Damette, 2013. "Mixture distribution hypothesis and the impact of a Tobin tax on exhange rate volatility : a reassessment," Working Papers of BETA 2013-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  8. M. Frömmel & A. Mende & L. Menkhoff, 2007. "Order Flows, News, and Exchange Rate Volatility," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/474, Ghent University, Faculty of Economics and Business Administration.
  9. Genaro Sucarrat & Alvaro Escribano, 2010. "The power log-GARCH model," Economics Working Papers we1013, Universidad Carlos III, Departamento de Economía.
  10. Olivier Damette & Stéphane Goutte, 2014. "Tobin tax and trading volume tightening: a reassessment," Working Papers halshs-00926805, HAL.
  11. Francis Bismans & Olivier Damette, 2012. "La taxe Tobin : une synthèse des travaux basés sur la théorie des jeux et l’économétrie," Working Papers of BETA 2012-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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