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Nonlinear Features of Realized FX Volatility

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  • John M. Maheu
  • Thomas McCurdy

Abstract

This paper investigates nonlinear features of FX volatility dynamics using estimates of daily volatility based on the sum of intraday squared returns. Measurement errors associated with using realized volatility to estimate ex post latent volatility imply that standard time series models of the conditional variance become variants of an ARMAX model. We explore nonlinear departures from these linear specifications using a doubly stochastic process under duration-dependent mixing. This process can capture large abrupt changes in the level of volatility, time-varying persistence, and time-varying variance of volatility. The results have implications for forecast precision, hedging, and pricing of derivatives. © 2002 President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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  • John M. Maheu & Thomas McCurdy, 2001. "Nonlinear Features of Realized FX Volatility," CIRANO Working Papers 2001s-42, CIRANO.
    • Handle: RePEc:cir:cirwor:2001s-42
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    More about this item

    Keywords

    High-frequency data; realized volatility; semi-Marko; Données à haute fréquence; volatilité réalisée; demi-Markov;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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