The Distribution of Exchange Rate Volatility
November 2, 1999
Torben G. Andersen, Tim Bollerslev , Francis X. Diebold and Paul Labys
ABSTRACT
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, and remarkably precise scaling laws under temporal aggregation.
Subject: Investments/Volatility of Asset Prices; Investments/Econometrics; International Finance
Classification: Empirical/Theoretical
Andersen: (847) 467-1285 t-andersen@nwu.edu
Bollerslev: (919) 660-1846 boller@econ.duke.edu
Diebold: (610)585-4057 fdiebold@stern.nyu.edu
Labys: (215) 545-0450 labys@ssc.sas.upenn.edu
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