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Publication - Dr Evarist Stoja

    A Cyclical Model of Exchange Rate Volatility

    Citation

    Stoja, E, Harris, F, Yilmaz, Ra & , 2011, ‘A Cyclical Model of Exchange Rate Volatility’. Journal of Banking and Finance, vol 35., pp. 3055 - 3064

    Abstract

    In this paper, we investigate the long run dynamics of the intraday range of the GBP/USD, JPY/USD and CHF/USD exchange rates. We use a non-parametric filter to extract the low frequency component of the intraday range, and model the cyclical deviation of the range from the long run trend as a stationary autoregressive process. We use the cyclical volatility model to generate out-of-sample forecasts of exchange rate volatility for horizons of up to 1 year under the assumption that the long run trend is fully persistent. As a benchmark, we compare the forecasts of the cyclical volatility model with those of the range-based EGARCH and FIEGARCH models of Brandt and Jones (2006). Not only does the cyclical volatility model provide a very substantial computational advantage over the EGARCH and FIEGARCH models, but it also offers an improvement in out-of-sample forecast performance.

    Full details in the University publications repository