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The Distribution of Exchange Rate Volatility

  • Torben Andersen
  • Tim Bollerslev
  • Francis X. Diebold
  • Paul Labys

Using high-frequency data on Deutschemark and Yen returns against the dollar, we construct model-free estimates of daily exchange rate volatility and correlation, covering an entire decade. In addition to being model-free, our estimates are also approximately free of measurement error under general conditions, which we delineate. Hence, for all practical purposes, we can treat the exchange rate volatilities and correlations as observed rather than latent. We do so, and we characterize their joint distribution, both unconditionally and conditionally. Noteworthy results include a simple normality-inducing volatility transformation, high contemporaneous correlation across volatilities, high correlation between correlation and volatilities, pronounced and highly persistent temporal variation in both volatilities and correlation, clear evidence of long-memory dynamics in both volatilities and correlation remarkably precise scaling laws under temporal aggregation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6961.

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Date of creation: Feb 1999
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Publication status: published as Andersen, Torben G., Tim Bollerslev, Francis X. Diebold and Paul Labys. "The Distribution Of Realized Exchange Rate Volatility," Journal of the American Statistical Association, 2001, v96(453,Mar), 42-55.
Handle: RePEc:nbr:nberwo:6961
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