An empirical analysis of exchange rates using high-frequency data
This collection of studies examines several aspects of the behaviour of exchange rates using high-frequency data. Chapter 1 provides an introduction to the thesis, details the structure of what follows and presents a selective review of relevant literature. Chapters 2 and 3 focus on issues related to the microstructure of the foreign exchange market. Employing a short, transactions based data set derived from an electronic, inter-dealer broking system they test hypotheses related to the linkage between inside spreads and foreign exchange market volatility, the existence of private information on foreign exchange markets and the effects of 'thin markets' on the dynamics of quotations. Chapter 4 concentrates on the behaviour of intraday foreign exchange volatility. The chapter presents and estimates a stochastic volatility model, extended to include intra-daily seasonality and the effects of U.S. macroeconomic announcements. Results demonstrate the importance of explicitly modelling the seasonal and show very large effects of public information releases. Chapter 5 builds on observations from Chapter 4 and estimates a long range dependent specification for volatility. Significant long memory is found in the volatilities of three major exchange rates and the long memory specification is shown to be superior to traditional short memory volatility specifications. Chapter 6 also extends the work in Chapter 4, examining the effect of U.S. and German macroeconomic news on the level of exchange rates. Estimations show that there are significant effects of U.S. and German 'news' at very high-frequencies but that these impacts are drowned very swiftly in subsequent exchange rate fluctuations. Finally, Chapter 7 uses daily data in order to examine the behaviour of the foreign exchange forward premium, proposing and estimating an explicitly non-linear model of forward premium behaviour. Results demonstrate that the forward premium is mean reverting, but in a non-linear fashion which cannot be captured in standard econometric specifications.