An examination of the intraday behavior of the yen/dollar exchange rate: The relationship between trading activity and returns volatility

This paper provides additional empirical evidence of the relationship between the volatility of returns and trading activity in foreign exchange markets. Five-minute yen/dollar returns exhibit significant skewness, kurtosis, negative first-order autocorrelation and heteroskedasticity. Market activity (as measured by the intensity of quote arrivals) has a positive and statistically significant effect on conditional returns volatility. Such evidence is consistent with predictions of mixture of distrubutions models.