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on Market Microstructure |
| By: | Markku Lanne |
| Abstract: | Forecasts of the realized volatility of the exchange rate returns of the Euro against the U.S. Dollar obtained directly and through decomposition are compared. Decomposing the realized volatility into its continuous sample path and jump components and modeling and forecasting them separately instead of directly forecasting the realized volatility is shown to lead to improved out-of-sample forecasts. Moreover, gains in forecast accuracy are robust with respect to the details of the decomposition. |
| Keywords: | Mixture model, Jump, Realized volatility, Gamma distribution |
| JEL: | C22 C52 C53 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2006/20&r=mst |
| By: | Markku Lanne; Timo Vesalay |
| Abstract: | We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets. Our argument stems from the decentralized trading practice and the presumable discrepancy between 'informed' and 'uninformed' traders' valuations. Since informed 'traders' valuations are likely to be less dispersed, a transaction tax penalizes informed trades disproportionately, leading to increased volatility. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility. |
| Keywords: | Transaction tax; exchange rates; volatility |
| JEL: | F31 F42 G15 G28 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2005/19&r=mst |