The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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On Cointegration and Exchange Rate Dynamics
Published: 06/01/1994 | DOI: 10.1111/j.1540-6261.1994.tb05160.x
FRANCIS X. DIEBOLD, JAVIER GARDEAZABAL, KAMIL YILMAZ
Baillie and Bollerslev (1989) have recently argued that nominal dollar spot exchange rates are cointegrated. Here we examine an immediate implication of their finding, namely, that cointegration implies an error‐correction representation yielding forecasts superior to those from a martingale benchmark, in light of a large earlier literature highlighting the predictive superiority of the martingale. In an out‐of‐sample forecasting exercise, we find the martingale model to be superior. We then perform a battery of improved cointegration tests and find that the evidence for cointegration is much less strong than previously thought, a result consistent with the outcome of the forecasting exercise.
Range‐Based Estimation of Stochastic Volatility Models
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00454
Sassan Alizadeh, Michael W. Brandt, Francis X. Diebold
We propose using the price range in the estimation of stochastic volatility models. We show theoretically, numerically, and empirically that range‐based volatility proxies are not only highly efficient, but also approximately Gaussian and robust to microstructure noise. Hence range‐based Gaussian quasi‐maximum likelihood estimation produces highly efficient estimates of stochastic volatility models and extractions of latent volatility. We use our method to examine the dynamics of daily exchange rate volatility and find the evidence points strongly toward two‐factor models with one highly persistent factor and one quickly mean‐reverting factor.