Long-memory and heterogeneous components in high frequency Pacific-Basin exchange rate volatility |
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Authors: | David?G?McMillan Email author" target="_blank">Alan?E?H?SpeightEmail author |
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Institution: | (1) School of Management, University of St Andrews, St Andrews, UK;(2) Department of Economics, School of Business & Economics, University of Wales, Swansea, SA2 8PP, UK |
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Abstract: | Recent research examining high-frequency financial data has suggested that volatility dynamics may be confounded by the existence
of an intra-day periodic pattern and multiple sources of volatility. This paper examines whether these dynamics are present
in the US Dollar exchange rates of five Pacific Basin economies. Using 30-min sampled returns, evidence of a ‘U’-shape intra-day
pattern in volatility for regional markets is reported and controlled for using a Flexible Fourier transform. Supportive evidence
for the existence of multiple volatility components is offered by semi-parametric fractional difference estimates of the long-memory
properties of absolute exchange rate returns at various intra-day data sampling frequencies. Further parametric evidence of
an explicit component structure in such high frequency exchange rate volatility is offered by the estimates of a component-GARCH
model which comprises both a long-run volatility component exhibiting slow shock decay and a short-run volatility component
exhibiting far more rapid decay, and provides a generally superior fit to the data. Further application of these C-GARCH models
in the analysis of high frequency volatility spillovers between the currencies considered also reveals that such spillovers
are predominantly transitory rather than highly persistent in nature, but that where volatility spillovers do impact on the
long-run component of exchange rate volatility the Australian Dollar plays a pivotal role in the localised causality transmission
mechanism.
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Keywords: | GARCH Intraday periodicity Long-run volatility Temporal aggregation |
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