Foreign Exchange Rates Have Surprising Volatility

Abstract

Local Polynomial Estimation (LPE) is implemented on a dataset of high-frequency foreign exchange (FX) quotes. This nonparametric technique is meant to provide a flexible background against which to evaluate parametric time series models. Assuming a conditionally heteroscedastic nonlinear autoregressive (CHARN) model, estimates of the mean and volatility functions are reported. The mean function displays pronounced reversion. Surprisingly, the volatility function exhibits asymmetry. The CHARN model, however, captures only the short-run behavior of conditional volatility. Nevertheless, part of the evidence of persistent conditional volatility appears in reality to be the effect of conditional ..