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Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market

Robert F. Engle, Takatoshi Ito and Wen-Ling Lin
Econometrica
Vol. 58, No. 3 (May, 1990), pp. 525-542
Published by: The Econometric Society
DOI: 10.2307/2938189
Stable URL: http://www.jstor.org/stable/2938189
Page Count: 18
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Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market
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Abstract

This paper seeks to explain the causes of volatility clustering in exchange rates. Careful examination of intra-daily exchange rates provides a test of two hypotheses--heat waves and meteor showers. The heat wave hypothesis is that the volatility has only country-specific autocorrelation. Alternatively, the meteor shower is a phenomenon of intra-daily volatility spillovers from one market to the next. Using the GARCH model to specify the heteroskedasticity across intra-daily market segments, we find that the empirical evidence is generally against the null hypothesis of the heat wave. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per-hour volatility in other markets.

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