Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian
October 26, 1999
Torben G. Andersen, Tim Bollerslev, Francis X. Diebold and Paul Labys
ABSTRACT
It is well known that high-frequency asset returns are fat-tailed relative to the Gaussian distribution, and that the fat tails are typically reduced but not eliminated when returns are standardized by volatilities estimated from popular models such as GARCH. We consider two major dollar exchange rates, and we show that returns standardized instead by the realized volatilities of Andersen, Bollerslev, Diebold and Labys (1999) are very nearly Gaussian. We perform both univariate and multivariate analyses, we trace the different effects of the different standardizations to differences in information sets, and we draw implications for the presence of jumps in exchange rate diffusions.
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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