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A Range-Based Multivariate Stochastic Volatility Model for Exchange Rates

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  • Ben Tims
  • Ronald Mahieu

Abstract

In this paper we present a parsimonious multivariate model for exchange rate volatilities based on logarithmic high-low ranges of daily exchange rates. The multivariate stochastic volatility model decomposes the log range of each exchange rate into two independent latent factors, which could be interpreted as the underlying currency specific components. Owing to the empirical normality of the logarithmic range measure the model can be estimated conveniently with the standard Kalman filter methodology. Our results show that our model fits the exchange rate data quite well. Exchange rate news seems to be currency specific and allows identification of currency contributions to both exchange rate levels and exchange rate volatilities.

Suggested Citation

  • Ben Tims & Ronald Mahieu, 2006. "A Range-Based Multivariate Stochastic Volatility Model for Exchange Rates," Econometric Reviews, Taylor & Francis Journals, vol. 25(2-3), pages 409-424.
    • Handle: RePEc:taf:emetrv:v:25:y:2006:i:2-3:p:409-424
    DOI: 10.1080/07474930600712814
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    References listed on IDEAS

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    Cited by:

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    2. Anders Johansson, 2009. "Stochastic volatility and time-varying country risk in emerging markets," The European Journal of Finance, Taylor & Francis Journals, vol. 15(3), pages 337-363.
    3. Manabu Asai, 2013. "Heterogeneous Asymmetric Dynamic Conditional Correlation Model with Stock Return and Range," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(5), pages 469-480, August.
    4. Saldaña-Zepeda, Dayna P. & Velasco-Cruz, Ciro & Torres-Preciado, Víctor H., 2020. "Mexican peso-USD exchange rate: A switching linear dynamical model application," International Economics, Elsevier, vol. 162(C), pages 80-91.
    5. Mike K. P. So & C. Y. Choi, 2009. "A threshold factor multivariate stochastic volatility model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(8), pages 712-735.
    6. Manabu Asai & Michael McAleer & Jun Yu, 2006. "Multivariate Stochastic Volatility," Microeconomics Working Papers 22058, East Asian Bureau of Economic Research.
    7. Siddhartha Chib & Yasuhiro Omori & Manabu Asai, 2007. "Multivariate stochastic volatility (Revised in May 2007, Handbook of Financial Time Series (Published in "Handbook of Financial Time Series" (eds T.G. Andersen, R.A. Davis, Jens-Peter Kreiss," CARF F-Series CARF-F-094, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    8. Fiszeder, Piotr & Fałdziński, Marcin & Molnár, Peter, 2023. "Modeling and forecasting dynamic conditional correlations with opening, high, low, and closing prices," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 308-321.

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