Multi-Scaling of Foreign Exchange Volatility
نویسندگان
چکیده
In this paper, we investigate the scaling properties of foreign exchange volatility. Our methodology is based on a wavelet multi-scaling approach which decomposes the variance of a time series and the covariance between two time series on a scale by scale basis through the application of a discrete wavelet transformation. It is shown that foreign exchange rate volatilities follow different scaling laws at different horizons. Particularly, there is a smaller degree of persistence in intra-day volatility as compared to volatility at one day and higher scales. Therefore, a common practice in the risk management industry to convert risk measures calculated at shorter horizons into longer horizons through a global scaling parameter may not be appropriate. This paper also demonstrates that correlation between the foreign exchange volatilities is the lowest at the intra-day scales but exhibits a gradual increase up to a daily scale. The correlation coefficient stabilizes at scales one day and higher. Therefore, the benefit of currency diversification is the greatest at the intra-day scales and diminishes gradually at higher scales (lower frequencies). The wavelet cross-correlation analysis also indicates that the association between two volatilities is stronger at lower frequencies. Corresponding author: Department of Economics, University of Windsor, Windsor, Ontario, N9B 3P4, Canada. Ramazan Gençay gratefully acknowledges financial support from the Natural Sciences and Engineering Research Council of Canada and the Social Sciences and Humanities Research Council of Canada. We are grateful to Olsen & Associates for providing the data used in this paper. Department of Economics, Bilkent University, Bilkent 06533, Ankara, Turkey. EURANDOM, P.O. Box 513, 5600 MB Eindhoven, The Netherlands.
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تاریخ انتشار 2000