A Cyclical Model of Exchange Rate Volatility

E Stoja, Richard Harris, Faith Yilmaz

Research output: Contribution to journalArticle (Academic Journal)peer-review

14 Citations (Scopus)

Abstract

In this paper, we investigate the long run dynamics of the intraday range of the GBP/USD, JPY/USD and CHF/USD exchange rates. We use a non-parametric filter to extract the low frequency component of the intraday range, and model the cyclical deviation of the range from the long run trend as a stationary autoregressive process. We use the cyclical volatility model to generate out-of-sample forecasts of exchange rate volatility for horizons of up to 1 year under the assumption that the long run trend is fully persistent. As a benchmark, we compare the forecasts of the cyclical volatility model with those of the range-based EGARCH and FIEGARCH models of Brandt and Jones (2006). Not only does the cyclical volatility model provide a very substantial computational advantage over the EGARCH and FIEGARCH models, but it also offers an improvement in out-of-sample forecast performance.
Translated title of the contributionA Cyclical Model of Exchange Rate Volatility
Original languageEnglish
Pages (from-to)3055 - 3064
Number of pages10
JournalJournal of Banking and Finance
Volume35
Issue number11
DOIs
Publication statusPublished - Nov 2011

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