Bridging the gap between the distribution of realized (ECU) volatility and ARCH modelling (of the Euro): the GARCH-NIG model
Article first published online: 28 OCT 2002
Copyright © 2002 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Special Issue: Modelling and Forecasting Financial Volatility
Volume 17, Issue 5, pages 535–548, September/October 2002
How to Cite
Forsberg, L. and Bollerslev, T. (2002), Bridging the gap between the distribution of realized (ECU) volatility and ARCH modelling (of the Euro): the GARCH-NIG model. J. Appl. Econ., 17: 535–548. doi: 10.1002/jae.685
- Issue published online: 28 OCT 2002
- Article first published online: 28 OCT 2002
- Manuscript Revised: 21 MAY 2002
- Manuscript Received: 31 OCT 2001
- The Swedish Foundation for International Cooperation in Research and Higher Education (STINT). Grant Number: IG 2002-02 045
- Jan Wallanders and Tom Hedelius Foundation. Grant Number: J 01-28
This paper bridges the gap between traditional ARCH modelling and recent advances on realized volatilities. Based on a ten-year sample of five-minute returns for the ECU basket currencies versus the US dollar, we find that the realized volatilities constructed from the summation of the high-frequency intraday squared returns conditional on the lagged squared daily returns are approximately Inverse Gaussian (IG) distributed, while the distribution of the daily returns standardized by their realized volatilities is approximately normal. Moreover, the implied daily GARCH model with Normal Inverse Gaussian (NIG) errors estimated for the ECU returns results in very accurate out-of-sample predictions for the three years of actual daily Euro/US dollar exchange rates. Copyright © 2002 John Wiley & Sons, Ltd.