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Which continuous-time model is most appropriate for exchange rates?

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  • Deniz Erdemlioglu
  • Sébastien Laurent
  • Christopher J. Neely

Abstract

This paper attempts to realistically model the underlying exchange rate data generating process. We ask what types of diffusion or jump features are most appropriate. The most plausible model for 1-minute data features Brownian motion and Poisson jumps but not infinite activity jumps. Modeling periodic volatility is necessary to accurately identify the frequency of jump occurrences and their locations. We propose a two-stage method to capture the effects of these periodic volatility patterns. Simulations show that microstructure noise does not significantly impair the statistical tests for jumps and diffusion behavior.>

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-024.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-024

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Keywords: Foreign exchange ; Time-series analysis;

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References

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