Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian

Andersen, Torben G.; Bollerslev, Tim; Diebold, Francis X.; Labys, Paul

Volume 4, Numbers 3 & 4 / September/December , Pages 159-288

Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 159-179

Torben G. Andersen , Northwestern University, U.S.A. Corresponding Author

Tim Bollerslev , Duke University and NBER, U.S.A.
Francis X. Diebold , University of Pennsylvania and NBER, U.S.A.
Paul Labys , University of Pennsylvania, U.S.A.

Abstract:
It is well known that high-frequency asset returns are fat-tailed relative to the Gaussian distribution, and that the fat tails are typically reduced but not eliminated when returns are standardized by volatilities estimated from popular ARCH and stochastic volatility models. We consider two major dollar exchange rates, and we show that returns standardized instead by the realized volatilities of Andersen, Bollerslev, Diebold and Labys (2000a) are very nearly Gaussian. We perform both univariate and multivariate analyses, and we trace the differing effects of the different standardizations to differences in information sets

Keywords : high-frequency data; integrated volatility; realized volatility; risk management
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