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Trading Patterns, Time Deformation and Stochastic Volatility in Foreign Exchange Markets

  • Eric Ghysels
  • Christian Gouriéroux
  • Joanna Jasiak

Globalization of trading in foreign exchange markets is a principal source of the daily and weekly seasonability in market volatility. One way to model such phenomena is to adopt a framework where market volatility is tied to the intensity of (world) trading through a subordinated stochastic process representation. In this paper we combine elements from Clark (1973), Dacorogna et al. (1993) and Ghysels and Jasiak (1994), and present a stochastic volatility model for foreign exchange markets with time deformation. The time deformation is based on daily patterns of arrivals of quotes and bid-ask spreads as well as returns. For empirical estimation we use the QMLE algorithm of Harvey et al. (1994), adopted by Ghysels and Jasiak for time deformed processes, and applied to the Olsen and Associates high frequency data set. La globalisation des échanges sur le marché mondial des taux de change est une des sources principales des effets saisonniers journaliers et hebdomadaires dans la volatilité des prix. Une façon de modéliser ces phénomènes consiste à utiliser la spécification d'un processus subordonné pour formaliser la relation entre la volatilité et l'intensité des échanges. Cet article, fondé sur les idées de Clark (1973), Dacorogna et al. (1993) et Ghysels et Jasiak (1994), présente un modèle de volatilité stochastique avec la déformation du temps pour les séries des taux de change. La déformation du temps est déterminée par la dynamique du flux des cotations à travers la journée, les fourchettes de prix passées ainsi que les rendements antérieurs. Dans la partie empirique, nous appliquons ce modèle aux données de haute fréquence de Olsen and Associates. La méthode d'estimation que nous avons employée est le Quasi-Maximum de Vraisemblance proposé par Harvey et Stock, adapté par Ghysels et Jasiak aux processus déformés du temps.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 95s-42.

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Length: 55 pages
Date of creation: 01 Oct 1995
Date of revision:
Handle: RePEc:cir:cirwor:95s-42
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