Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian
23 Pages Posted: 10 Mar 2000 Last revised: 19 Jun 2022
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Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian
Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian
Date Written: January 2000
Abstract
It is well known that high-frequency asset returns are fat-tailed relative to the Gaussian distribution 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.
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