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Transmission of volatility and trading activity in the global interdealer foreign exchange market: evidence from electronic broking services (EBS) data

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Author Info

  • Fang Cai
  • Edward Howorka
  • Jon Wongswan

Abstract

This paper studies the transmission of volatility and trading activity in the foreign exchange market across trading regions for the euro-dollar and dollar-yen currency pairs, using high-frequency intraday data from Electronic Broking Services (EBS). In contrast with previous studies that use indicative quote frequency to proxy for trading activity, we use actual regional trading volume to identify five distinct trading regions in the foreign exchange market: Asia Pacific, the Asia-Europe overlap, Europe, the Europe-America overlap, and America. Based on realized volatility computed from high-frequency data and a regional volatility model, we find statistically significant evidence for volatility spillovers at both the own-region and the inter-region levels, but the economic significance of own-region spillovers is much more important than that of inter-region spillovers. We also examine the transmission of trading activity (trading volume and number of transactions) across the five trading regions and find similar results to those for volatility, but the economic significance of own-region spillovers is even more dominant.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 863.

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Date of creation: 2006
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Handle: RePEc:fip:fedgif:863

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Related research

Keywords: Foreign exchange rates ; International finance;

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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.
  2. Shalen, Catherine T, 1993. "Volume, Volatility, and the Dispersion of Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 405-34.
  3. Alain P. Chaboud & Sergey Chernenko & Edward Howorka & Raj S. Krishnasami Iyer & David Liu & Jonathan H. Wright, 2004. "The high-frequency effects of U.S. macroeconomic data releases on prices and trading activity in the global interdealer foreign exchange market," International Finance Discussion Papers 823, Board of Governors of the Federal Reserve System (U.S.).
  4. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Labys, Paul, 2002. "Modeling and Forecasting Realized Volatility," Working Papers 02-12, Duke University, Department of Economics.
  5. Jon Danielsson & Richard Payne, 1999. "Real Trading Patterns and Prices in Spot Foreign Exchange Markets," FMG Discussion Papers dp320, Financial Markets Group.
  6. Michael Melvin & Xixi Yin, . "Public Information Arrival, Exchange Rate Volatility, and Quote Frequency," Working Papers 96/1, Arizona State University, Department of Economics.
  7. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
  8. Baillie, Richard T & Bollerslev, Tim, 1991. "Intra-day and Inter-market Volatility in Foreign Exchange Rates," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 565-85, May.
  9. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  10. Hogan, Kedreth Jr. & Melvin, Michael T., 1994. "Sources of meteor showers and heat waves in the foreign exchange market," Journal of International Economics, Elsevier, vol. 37(3-4), pages 239-247, November.
  11. Michael Melvin & Bettina Peiers Melvin, 2003. "The Global Transmission of Volatility in the Foreign Exchange Market," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 670-679, August.
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Cited by:
  1. Chris D'Souza, 2007. "Where Does Price Discovery Occur in FX Markets?," Working Papers 07-52, Bank of Canada.
  2. Vít Bubák & Evžen Kocenda & Filip Zikes, 2010. "Volatility Transmission in Emerging European Foreign Exchange Markets," CESifo Working Paper Series 3063, CESifo Group Munich.

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