A Range-Based Multivariate Model for Exchange Rate Volatility
AbstractIn this paper we present a parsimonious multivariate model forexchange rate volatilities based on logarithmic high-low ranges ofdaily exchange rates. The multivariate stochastic volatility modeldivides the log range of each exchange rate into two independentlatent factors, which are interpreted as the underlying currencyspecific components. Due to the normality of logarithmic volatilitiesthe model can be estimated conveniently with standard Kalman filtertechniques. Our results show that our model fits the exchange ratedata quite well. Exchange rate news seems to be very currency-specificand allows us to identify which currency contributes most to bothexchange rate levels and exchange rate volatilities.
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Bibliographic InfoPaper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2003-022-F&A.
Date of creation: 10 Mar 2003
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exchange rates; multivariate stochastic volatility models; range-based volatility;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-19 (All new papers)
- NEP-ECM-2003-03-19 (Econometrics)
- NEP-ETS-2003-03-19 (Econometric Time Series)
- NEP-FMK-2003-03-19 (Financial Markets)
- NEP-IFN-2003-03-19 (International Finance)
- NEP-RMG-2003-03-19 (Risk Management)
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