The Journal of Finance

Trading Patterns and Prices in the Interbank Foreign Exchange Market

Published: 09/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04760.x

TIM BOLLERSLEV, IAN DOMOWITZ

The behavior of quote arrivals and bid‐ask spreads is examined for continuously recorded deutsche mark‐dollar exchange rate data over time, across locations, and by market participants. A pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns. Models for the conditional mean and variance of returns and bid‐ask spreads indicate volatility clustering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds for spread volatility. Conditional returns volatility is increasing in the size of the spread.

Tails, Fears, and Risk Premia

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01695.x

TIM BOLLERSLEV, VIKTOR TODOROV

We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof, we identify and estimate a new Investor Fears index. The index reveals large time‐varying compensation for fears of disasters. Our empirical investigations involve new extreme value theory approximations and high‐frequency intraday data for estimating the expected jump tails under the statistical probability measure, and short maturity out‐of‐the‐money options and new model‐free implied variation measures for estimating the corresponding risk‐neutral expectations.

Deutsche Mark–Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.85732

Torben G. Andersen, Tim Bollerslev

This paper provides a detailed characterization of the volatility in the deutsche mark–dollar foreign exchange market using an annual sample of five‐minute returns. The approach captures the intraday activity patterns, the macroeconomic announcements, and the volatility persistence (ARCH) known from daily returns. The different features are separately quantified and shown to account for a substantial fraction of return variability, both at the intraday and daily level. The implications of the results for the interpretation of the fundamental “driving forces” behind the volatility process is also discussed.

Cointegration, Fractional Cointegration, and Exchange Rate Dynamics

Published: 06/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb05161.x

RICHARD T. BAILLIE, TIM BOLLERSLEV

Multivariate tests due to Johansen (1988, 1991) as implemented by Baillie and Bollerslev (1989a) and Diebold, Gardeazabal, and Yilmaz (1994) reveal mixed evidence on whether a group of exchange rates are cointegrated. Further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process. Hence, the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons.

Common Stochastic Trends in a System of Exchange Rates

Published: 03/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02410.x

RICHARD T. BAILLIE, TIM BOLLERSLEV

Univariate tests reveal strong evidence for the presence of a unit root in the univariate time‐series representation for seven daily spot and forward exchange rate series. Furthermore, all seven spot and forward rates appear to be cointegrated; that is, the forward premiums are stationary, and one common unit root, or stochastic trend, is detectable in the multivariate time‐series models for the seven spot and forward rates, respectively. This is consistent with the hypothesis that the seven exchange rates possess one long‐run relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates.

Heterogeneous Information Arrivals and Return Volatility Dynamics: Uncovering the Long‐Run in High Frequency Returns

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02722.x

TORBEN G. ANDERSEN, TIM BOLLERSLEV

Recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean‐reverting fractionally integrated process. Meanwhile, much shorter lived volatility dynamics are typically observed with high frequency intradaily returns. The present article demonstrates, that by interpreting the volatility as a mixture of numerous heterogeneous short‐run information arrivals, the observed volatility process may exhibit long‐run dependence. As such, the long‐memory characteristics constitute an intrinsic feature of the return generating process, rather than the manifestation of occasional structural shifts. These ideas are confirmed by our analysis of a one‐year time series of five‐minute Deutschemark‐U.S. Dollar exchange rates.

Variance‐ratio Statistics and High‐frequency Data: Testing for Changes in Intraday Volatility Patterns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00326

Torben G. Andersen, Tim Bollerslev, Ashish Das

Variance‐ratio tests are routinely employed to assess the variation in return volatility over time and across markets. However, such tests are not statistically robust and can be seriously misleading within a high‐frequency context. We develop improved inference procedures using a Fourier Flexible Form regression framework. The practical significance is illustrated through tests for changes in the FX intraday volatility pattern following the removal of trading restrictions in Tokyo. Contrary to earlier evidence, we find nodiscernible changes outside of the Tokyo lunch period. We ascribe the difference to the fragile finite‐sample inference of conventional variance‐ratio procedures and a single outlier.