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Exchange rate volatility and the mixture of distribution hypothesis

Author

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  • BAUWENS, Luc
  • RIME, Dagfinn
  • SUCARRAT, Genaro

Abstract

This paper 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 statiscally 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 volatillity 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 log-transformation on volatilities.
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Suggested Citation

  • BAUWENS, Luc & RIME, Dagfinn & SUCARRAT, Genaro, 2006. "Exchange rate volatility and the mixture of distribution hypothesis," LIDAM Reprints CORE 1788, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:1788
    DOI: 10.1007/s00181-005-0005-x
    Note: In : Empirical Economics, 30, 889-911, 2006
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    JEL classification:

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

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