Nonlinear Features of Realized Fx Volatility

Maheu, John M.; McCurdy, Thomas H.

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Nonlinear Features of Realized Fx Volatility

Review of Economics and Statistics, Vol. 84, No. 4, November 2002

14 Pages Posted: 31 Dec 2001 Last revised: 2 Mar 2012

See all articles by John M. Maheu

John M. Maheu

McMaster University - Michael G. DeGroote School of Business; RCEA

Thomas H. McCurdy

University of Toronto - Rotman School of Management

There are 2 versions of this paper

Date Written: March 1, 2012

Abstract

This paper investigates nonlinear features of FX volatility dynamics using estimates of daily volatility based on the sum of intraday squared returns. Measurement errors associated with using realized volatility to estimate ex post latent volatility imply that standard time series models of the conditional variance become variants of an AR-MAX model. We explore nonlinear departures from these linear specifications using a doubly stochastic process under duration-dependent mixing. This process can capture large abrupt changes in the level of volatility, time-varying persistence, and time-varying variance of volatility. The results have implications for forecast precision, hedging, and pricing of derivatives.

Keywords: high-frequency data, realized volatility, semi-Markov

JEL Classification: G150, C220

Suggested Citation: Suggested Citation

Maheu, John M. and McCurdy, Thomas H., Nonlinear Features of Realized Fx Volatility (March 1, 2012). Review of Economics and Statistics, Vol. 84, No. 4, November 2002, Available at SSRN: https://ssrn.com/abstract=294854