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

Author

Listed:
  • Torben G. Andersen

    (Northwestern University, U.S.A.)

  • Tim Bollerslev

    (Duke University and NBER, U.S.A.)

  • Francis X. Diebold

    (University of Pennsylvania and NBER, U.S.A.)

  • Paul Labys

    (University of Pennsylvania, U.S.A.)

Abstract

It is well known that high-frequency asset returns are fat-tailed relative to the Gaussian distribution, and that the fat tails are typically reduced but not eliminated when returns are standardized by volatilities estimated from popular ARCH and stochastic volatility models. We consider two major dollar exchange rates, and we show that returns standardized instead by the realized volatilities of Andersen, Bollerslev, Diebold and Labys (2000a) are very nearly Gaussian. We perform both univariate and multivariate analyses, and we trace the differing effects of the different standardizations to differences in information sets.

Suggested Citation

  • Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2000. "Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian," Multinational Finance Journal, Multinational Finance Journal, vol. 4(3-4), pages 159-179, September.
    • Handle: RePEc:mfj:journl:v:4:y:2000:i:3-4:p:159-179
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    More about this item

    Keywords

    high-frequency data; integrated volatility; realized volatility; risk management;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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