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Nonlinear Features of Realized FX Volatility
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Nonlinear Features of Realized FX Volatility

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.

Authors

Maheu JM; McCurdy TH

Publication date

January 1, 2001

DOI

10.2139/ssrn.275276

Preprint server

SSRN Electronic Journal
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