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 decomposes the log range of each exchange rate into two independent latent factors, which could be interpreted as the underlying currency specific components. Owing to the empirical normality of the logarithmic range measure the model can be estimated conveniently with the standard Kalman filter methodology. Our results show that our model fits the exchange rate data quite well. Exchange rate news seems to be currency specific and allows identification of currency contributions to both exchange rate levels and exchange rate volatilities. Copyright

Exchange rates, Multivariate stochastic volatility models, Range-based volatility,
Econometric Reviews
Erasmus Research Institute of Management

Tims, B, & Mahieu, R.J. (2006). A range-based multivariate stochastic volatility model for exchange rates. Econometric Reviews, 25(2-3), 409–424. doi:10.1080/07474930600712814