Forecasting the volatility of currency exchange rates

Currency volatility is defined to be the standard deviation of day-to-day changes in the logarithm of the exchange rate. After a discussion of statistical models for exchange rates, the paper describes methods for choosing and assessing volatility forecasts using open, high, low and close prices. Results for DM/$ futures prices at the IMM in Chicago from 1977 to 1983 show high and low prices are valuable when seeking accurate volatility forecasts. The best forecasts are a weighted average of present and past high, low and close prices, with adjustments for weekend and holiday effects. The forecasts can be used to value currency options.