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How Large is Excess Volatility of the EUR/USD Exchange Rate? Evidence from a GAS Approach

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  • Leonardo Bargigli

Abstract

Using a novel Generalized Autoregressive Score (GAS) methodology applied to EUR/USD high-frequency interdealer data on price variations and net demand in 2016, this paper provides evidence of a substantial violation of market efficiency in the foreign exchange market. The analysis shows that endogenous factors amplified efficient price fluctuations by at least 46\% on average, underscoring the importance of informational asymmetry and feedback trading in exchange rate dynamics. The key implication is that excess volatility of the EUR/USD exchange rate is not only sizeable but also structural, as it arises from mechanisms intrinsic to market functioning.

Suggested Citation

  • Leonardo Bargigli, 2025. "How Large is Excess Volatility of the EUR/USD Exchange Rate? Evidence from a GAS Approach," Working Papers - Economics wp2025_13.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2025_13.rdf
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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