What drives volatility persistence in the foreign exchange market?
By: David Berger ... [et al.].
Contributors: Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 862; International finance discussion papers (Online) -- no. 862.
Publisher: Federal Reserve Board
Published: 2006
Place of publication: Washington, D.C
Language: eng
Format: [electronic resource] /
Description: "We analyze the factors driving the widely-noted persistence in asset return volatility using a unique dataset on global euro-dollar exchange rate trading.  We propose a new simple empirical specification of volatility, based on the Kyle-model, which links volatility to the information flow, measured as the order flow in the market, and the price sensitivity to that information.  Through the use of high-frequency data, we are able to estimate the time-varying market sensitivity to information, and movements in volatility can therefore be directly related to movements in two observable variables, the order flow and the market sensitivity.  The empirical results are very strong and show that the model is able to explain almost all of the long-run variation in volatility.  Our results also show that the variation over time of the market's sensitivity to information plays at least as important a role in explaining the persistence of volatility as does the rate of information arrival itself.  The econometric analysis is conducted using novel estimation techniques which explicitly take into account the persistent nature of the variables and allow us to properly test for long-run relationships in the data"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 6/12/2006.

Includes bibliographical references.

Also available in print.

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Mode of access: World Wide Web.