Exchange Rate Returns Standardized by Realized Volatility Are (Nearly) Gaussian
AbstractThe prescriptions of modern financial risk management hinge critically on the associated characterization of the distribution of future returns (cf., Diebold, Gunther and Tay, 1998, and Diebold, Hahn and Tay, 1999). Because volatility persistence renders high-frequency returns temporally dependent (e.g., Bollerslev, Chou and Kroner, 1992), it is the conditional return distribution, and not the unconditional distribution, that is of relevance for risk management. This is especially true in high-frequency situations, such as monitoring and managing the risk associated with the day-to-day operations of a trading desk, where volatility clustering is omnipresent. Exchange rate returns are well-known to be unconditionally symmetric but highly leptokurtic. Standardized daily or weekly returns from ARCH and related stochastic volatility models also appear symmetric but leptokurtic; that is, the distributions are not only unconditionally, but also conditionally leptokurtic, although less so than unconditionally.1 A sizable literature explicitly attempts to model the fat-tailed conditional distributions, including, for example, Bollerslev (1987), Engle and Gonzalez-Rivera (1991), and Hansen (1994).
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-29.
Date of creation: Oct 1999
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Other versions of this item:
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2000. "Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian," NBER Working Papers 7488, National Bureau of Economic Research, Inc.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-060, New York University, Leonard N. Stern School of Business-.
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.:
- 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.
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RCER Working Papers
322, University of Rochester - Center for Economic Research (RCER).
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999.
"The Distribution of Exchange Rate Volatility,"
Center for Financial Institutions Working Papers
99-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
- 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.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "The Distribution of Exchange Rate Volatility," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-059, New York University, Leonard N. Stern School of Business-.
- Drost, F.C. & Nijman, T.E. & Werker, B.J.M., 1994.
"Estimation and testing in models containing both jumps and conditional heteroskedasticity,"
1994-105, Tilburg University, Center for Economic Research.
- Drost, Feike C & Nijman, Theo E & Werker, Bas J M, 1998. "Estimation and Testing in Models Containing Both Jump and Conditional Heteroscedasticity," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 237-43, April.
- Sanjiv R. Das & Rangarajan K. Sundaram, 1998.
"Of Smiles and Smirks: A Term-Structure Perspective,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
98-024, New York University, Leonard N. Stern School of Business-.
- 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.
- Hsieh, David A, 1989. "Modeling Heteroscedasticity in Daily Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 307-17, July.
- Engle, Robert F & Gonzalez-Rivera, Gloria, 1991. "Semiparametric ARCH Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 345-59, October.
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- Neil Shephard & Ole E. Barndorff-Nielsen, 1998. "Aggregation and model construction for volatility models," Economics Series Working Papers 1998-W07, University of Oxford, Department of Economics.
- 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.
- Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
- Nelson, Daniel B., 1996. "A Note on the Normalized Errors in ARCH and Stochastic Volatility Models," Econometric Theory, Cambridge University Press, vol. 12(01), pages 113-128, March.
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- Taylor, Stephen J. & Xu, Xinzhong, 1997. "The incremental volatility information in one million foreign exchange quotations," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 317-340, December.
- 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.
- Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
- Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December.
- 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.
- Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
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