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 divides the log range of each exchange rate into two independent latent factors, which are interpreted as the underlying currency specific components. Due to the normality of logarithmic volatilities the model can be estimated conveniently with standard Kalman filter techniques. Our results show that our model fits the exchange rate data quite well. Exchange rate news seems to be very currency-specific and allows us to identify which currency contributes most to both exchange rate levels and exchange rate volatilities.

exchange rates, multivariate stochastic volatility models, range-based volatility
Model Construction and Estimation (jel C51), Foreign Exchange (jel F31), International Financial Markets (jel G15), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M), Accounting (jel M41)
Erasmus Research Institute of Management
hdl.handle.net/1765/282
ERIM Report Series Research in Management
Copyright 2003, B. Tims, R. Mahieu, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.
Erasmus Research Institute of Management

Tims, B, & Mahieu, R.J. (2003). A Range-Based Multivariate Model for Exchange Rate Volatility (No. ERS-2003-022-F&A). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/282