High- and Low-Frequency Exchange Rate Volatility Dynamics: Range-Based Estimation of Stochastic Volatility Models / Sassan Alizadeh, Michael W. Brandt, Francis X. Diebold.

Format:

Book

Author/Creator:

Alizadeh, Sassan.

Contributor:

National Bureau of Economic Research.

Brandt, Michael W.

Diebold, Francis X.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8162.

NBER working paper series no. w8162

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

High- and Low-Frequency Exchange Rate Volatility Dynamics

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

We propose using the price range in the estimation of stochastic volatility models. We show theoretically, numerically, and empirically that the range is not only a highly efficient volatility proxy, but also that it is approximately Gaussian and robust to microstructure noise. The good properties of the range imply that range-based Gaussian quasi-maximum likelihood estimation produces simple and highly efficient estimates of stochastic volatility models and extractions of latent volatility series. We use our method to examine the dynamics of daily exchange rate volatility and discover that traditional one-factor models are inadequate for describing simultaneously the high- and low-frequency dynamics of volatility. Instead, the evidence points strongly toward two-factor models with one highly persistent factor and one quickly mean-reverting factor.

Notes:

Print version record

March 2001.