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Econometric modeling of exchange rate volatility and jumps

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  • Deniz Erdemlioglu
  • Sébastien Laurent
  • Christopher J. Neely

Abstract

This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades. Academic researchers have sought to fit the three major characteristics of foreign exchange volatility: intraday periodicity, autocorrelation and discontinuities in prices. Early research modeled the autocorrelation in daily and weekly squared foreign exchange returns with ARCH/GARCH models. Increased computing power and availability of high-frequency data allowed later researchers to improve volatility and jumps estimates. Researchers also found it useful to incorporate information about periodic volatility patterns and macroeconomic announcements in their calculations. This article details these volatility and jump estimation methods, compares those methods empirically and provides some suggestions for further research.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-008.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-008

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Keywords: Foreign exchange ; Time-series analysis;

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