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 contribution | A Cyclical Model of Exchange Rate Volatility |
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Original language | English |
Pages (from-to) | 3055 - 3064 |
Number of pages | 10 |
Journal | Journal of Banking and Finance |
Volume | 35 |
Issue number | 11 |
DOIs | |
Publication status | Published - Nov 2011 |