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

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  • Torben G. Andersen
  • Tim Bollerslev
  • Francis X. Diebold
  • Paul Labys

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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Bibliographic Info

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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Publication status: published as Andersen, Torben G., Tim Bollerslev, Francis X. Diebold and Paul Labys. "The Distribution Of Realized Exchange Rate Volatility," Journal of the American Statistical Association, 2001, v96(453,Mar), 42-55.
Handle: RePEc:nbr:nberwo:7488

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  1. Hansen, B.E., 1992. "Autoregressive Conditional Density Estimation," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 322, University of Rochester - Center for Economic Research (RCER).
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  6. Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1839-77, December.
  7. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "The Distribution of Exchange Rate Volatility," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 99-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
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