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Detrending the realized volatility in the global FX market

Listed author(s):
  • Schmidt, Anatoly B.
Registered author(s):

    There has been growing interest in realized volatility (RV) of financial assets that is calculated using intra-day returns. The choice of optimal time grid for these calculations is not trivial and generally requires analysis of RV dependence on the grid spacing (so-called RV signature). Typical RV signatures have a maximum at the finest time grid spacing available, which is attributed to the microstructure effects. This maximum decays into a plateau at lower frequencies, which implies (almost) stationary return variance. We found that the RV signatures in the modern global FX market may have no plateau or even have a maximum at lower frequencies. Simple averaging methods used to address the microstructure effects in equities have no practical effect on the FX RV signatures. We show that local detrending of the high-frequency FX rate samples yields RV signatures with a pronounced plateau. This implies that FX rates can be described with a Brownian motion having non-stationary trend and stationary variance. We point at a role of algorithmic trading as a possible cause of micro-trends in FX rates.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378437109000843
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    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 388 (2009)
    Issue (Month): 9 ()
    Pages: 1887-1892

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    Handle: RePEc:eee:phsmap:v:388:y:2009:i:9:p:1887-1892
    DOI: 10.1016/j.physa.2009.01.029
    Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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    1. Plamen Ch. Ivanov & Ainslie Yuen & Boris Podobnik & Youngki Lee, 2004. "Common Scaling Patterns in Intertrade Times of U. S. Stocks," Papers cond-mat/0403662, arXiv.org.
    2. Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
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    10. Ole E. Barndorff-Nielsen & Peter Reinhard Hansen & Asger Lunde & Neil Shephard, 2008. "Designing Realized Kernels to Measure the ex post Variation of Equity Prices in the Presence of Noise," Econometrica, Econometric Society, vol. 76(6), pages 1481-1536, November.
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