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Nonlinear Features of Realized FX Volatility

  • John M. Maheu
  • Thomas H. McCurdy

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 measure 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. Dans cet article, nous étudions les caractéristiques nonlinéaires de la dynamique de la volatilité des taux de change à l'aide d'estimations de la volatilité quotidienne basées sur la somme du carré des rendements intraquotidiens. Les erreurs de mesure commises en utilisant la volatilité réalisée pour mesurer la volatilité latente ex post font en sorte que les modèles standards de séries chronologiques de la variance conditionnelle deviennent des variantes d'un modèle ARMAX. Nous explorons des alternatives nonlinéaires à ces spécifications linéaires en utilisant un processus doublement stochastique, avec mixage dépendant de la durée. Ce processus peut capter des changements importants et abrupts dans le niveau de la volatilité, de même qu'une persistence et une variance de la volatilité variant dans le temps. Nos résultats influent sur la précision des prévisions, la couverture et l'évaluation des produits dérivés.

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File URL: http://www.cirano.qc.ca/files/publications/2001s-42.pdf
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Paper provided by CIRANO in its series CIRANO Working Papers with number 2001s-42.

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Length: 41 pages
Date of creation: 01 Jun 2001
Date of revision:
Handle: RePEc:cir:cirwor:2001s-42
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