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Exchange rate volatility and the mixture of distribution hypothesis

In: High Frequency Financial Econometrics

Author

Listed:
  • Luc Bauwens

    (Université catholique de Louvain)

  • Dagfinn Rime

    (Norges Bank)

  • Genaro Sucarrat

    (Université catholique de Louvain)

Abstract

This study sheds new light on the mixture of distribution hypothesis by means of a study of the weekly exchange rate volatility of the Norwegian krone. In line with other studies we find that the impact of information arrival on exchange rate volatility is positive and statistically significant, and that the hypothesis that an increase in the number of traders reduces exchange rate volatility is not supported. The novelties of our study consist in documenting that the positive impact of information arrival on volatility is relatively stable across three different exchange rate regimes, and in that the impact is relatively similar for both weekly volatility and weekly realised volatility. It is not given that the former should be the case since exchange rate stabilisation was actively pursued by the central bank in parts of the study period. We also report a case in which undesirable residual properties attained within traditional frameworks are easily removed by applying the logtransformation on volatilities.

Suggested Citation

  • Luc Bauwens & Dagfinn Rime & Genaro Sucarrat, 2008. "Exchange rate volatility and the mixture of distribution hypothesis," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 7-29, Springer.
    • Handle: RePEc:spr:stecpp:978-3-7908-1992-2_2
    DOI: 10.1007/978-3-7908-1992-2_2
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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