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Exchange Rate Volatility and the Mixture of Distribution Hypothesis

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  • Luc, BAUWENS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Dagfinn, RIME
  • Genaro, SUCARRAT

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 statiscally 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 volatillity 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, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005043.

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Length: 33
Date of creation: 01 Jul 2005
Date of revision:
Handle: RePEc:ctl:louvec:2005043

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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. 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.
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  3. 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.
  4. 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.
  5. BAUWENS, Luc & BEN OMRANE, Walid, 2003. "News annoucements, market activity and volatility in the Euro/Dollar foreign exchange market," CORE Discussion Papers 2003029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  8. 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).
  9. Michael Melvin & Xixi Yin, . "Public Information Arrival, Exchange Rate Volatility, and Quote Frequency," Working Papers 96/1, Arizona State University, Department of Economics.
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  12. 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.
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  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.
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  17. 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.
  18. 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.
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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. repec:imd:wpaper:wp2010-25 is not listed on IDEAS
  3. 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.
  4. 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.
  5. Genaro Sucarrat & Alvaro Escribano, 2010. "The power log-GARCH model," Economics Working Papers we1013, Universidad Carlos III, Departamento de Economía.
  6. 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.
  7. Dagfinn Rime & Genaro Sucarrat, 2007. "Exchange rate variability, market activity and heterogeneity," Economics Working Papers we077039, Universidad Carlos III, Departamento de Economía.

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