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Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian

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Author Info
Torben G. Andersen
Tim Bollerslev
Francis X. Diebold
Paul Labys

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Abstract

It is well known that high-frequency asset returns are fat-tailed relative to the Gaussian distribution tails are typically reduced but not eliminated when returns are standardized by volatilities estimated from popular models such as GARCH. We consider two major dollar exchange rates, and we show that returns standardized instead by the realized volatilities of Andersen, Bollerslev, Diebold and Labys (1999) are very nearly Gaussian. We perform both univariate and multivariate analyses, we trace the different effects of the different standardizations to differences in information sets, and we draw implications for the presence of jumps in exchange rate diffusions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7488.

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Date of creation: Jan 2000
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Handle: RePEc:nbr:nberwo:7488

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G0 - Financial Economics - - General
C0 - Mathematical and Quantitative Methods - - General

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Torben Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "The Distribution of Exchange Rate Volatility," NBER Working Papers 6961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
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  5. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-30, August. [Downloadable!] (restricted)
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  6. Drost, F.C. & Nijman, T.E. & Werker, B.J.M., 1994. "Estimation and Testing in Models Containing Both Jumps and Conditional Heteroskedasticity," Discussion Paper 105, Tilburg University, Center for Economic Research. [Downloadable!]
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  7. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August. [Downloadable!] (restricted)
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  9. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
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  14. Francis X. Diebold & Jinyong Hahn & Anthony S. Tay, 1999. "Multivariate Density Forecast Evaluation And Calibration In Financial Risk Management: High-Frequency Returns On Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 661-673, November. [Downloadable!] (restricted)
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  16. Das, Sanjiv Ranjan & Sundaram, Rangarajan K., 1999. "Of Smiles and Smirks: A Term Structure Perspective," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(02), pages 211-239, June. [Downloadable!]
  17. Barndorf-Nielsen, O.E. & Shephard, N., 1998. "Aggregation and Model Construction for Volatility Models," Economics Papers 141, Economics Group, Nuffield College, University of Oxford.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Heiko Ebens, 2000. "The Distribution of Stock Return Volatility," NBER Working Papers 7933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Elena Andreou & Eric Ghysels, 2003. "Test for Breaks in the Conditional Co-Movements of Asset Returns," University of Cyprus Working Papers in Economics 3-2003, University of Cyprus Department of Economics. [Downloadable!]
    Other versions:
  3. Lars Forsberg & Tim Bollerslev, 2002. "Bridging the gap between the distribution of realized (ECU) volatility and ARCH modelling (of the Euro): the GARCH-NIG model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 535-548. [Downloadable!]
  4. John Cotter, 2005. "Tail behaviour of the euro," Applied Economics, Taylor and Francis Journals, vol. 37(7), pages 827-840, April. [Downloadable!] (restricted)
    Other versions:
  5. Georgios Chortareas & John Nankervis & Ying Jiang, 2007. "Forecasting Exchange Rate Volatility with High Frequency Data: Is the Euro Different?," Money Macro and Finance (MMF) Research Group Conference 2006 79, Money Macro and Finance Research Group. [Downloadable!]
  6. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2002. "Parametric and Nonparametric Volatility Measurement," Center for Financial Institutions Working Papers 02-27, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  7. C. L. Osler, 2002. "Stop-loss orders and price cascades in currency markets," Staff Reports 150, Federal Reserve Bank of New York. [Downloadable!]
  8. Georges Dionne & Pierre Duchesne & Maria Pacurar, 2005. "Intraday Value at Risk (IVaR) Using Tick-by-Tick Data with Application to the Toronto Stock Exchange," Cahiers de recherche 0533, CIRPEE. [Downloadable!]
  9. 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). [Downloadable!]
    Other versions:
  10. Ole E. Barndorff-Nielsen & Neil Shephard, 2000. "Econometric analysis of realised volatility and its use in estimating stochastic volatility models," Economics Papers 2001-W4, Economics Group, Nuffield College, University of Oxford, revised 05 Jul 2001. [Downloadable!]
    Other versions:
  11. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "(Understanding, Optimizing, Using and Forecasting) Realized Volatility and Correlation," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-061, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  12. Ole E. Barndorff-Nielsen & Neil Shephard, 2001. "Integrated OU Processes," Economics Papers 2001-W1, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  13. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Jin Wu, 2005. "A Framework for Exploring the Macroeconomic Determinants of Systematic Risk," American Economic Review, American Economic Association, vol. 95(2), pages 398-404, May. [Downloadable!]
    Other versions:
  14. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," NBER Working Papers 8160, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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