Distribution and Dynamics of Central-European Exchange Rates: Evidence from Intraday Data

Finance a Uver (Impact Factor: 0.35). 01/2009; 59(4):334-359.
Source: RePEc


This paper investigates the behavior of the EUR/CZK, EUR/HUF and EUR/PLN spot exchange rates in the period 2002–2008, using 5-minute intraday data. The authors find that daily returns on the corresponding exchange rates scaled by model-free estimates of daily realized volatility are approximately normally distributed and independent over time. On the other hand, daily realized variances exhibit substantial positive skewness and very persistent, long-memory type of dynamics. The authors estimate a simple three-equation model for daily returns, realized variance and the time-varying volatility of realized variance. The model captures all salient features of the data very well and can be successfully employed for constructing point, as well as density forecasts for future volatility. The authors also discuss some issues associated with measuring volatility from the noisy high-frequency data and employ a simple correction that accounts for the distortions present in our dataset.

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    • "By extending the model in this manner, we are able to capture the volatility-of-volatility effect; i.e., an empirical observation that the volatility of volatility tends to increase (decrease) whenever volatility itself increases (decreases). While the idea is not new (Corsi, Mittnik, Pigorsch, & Pigorsch, 2008), our motivation for generalizing the model with an MGARCH structure is driven by recent findings that a univariate HAR-GARCH model fits very well the realized variances of the Central European exchange rates (Bubak & Zikes, 2009 . ) To model the dynamics of the conditional variance of the innovation process we employ the DCC model of (Engle R. F., 2002). "
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