Econometrica: May, 1990, Volume 58, Issue 3

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

https://doi.org/0012-9682(199005)58:3<525:MSOHWH>2.0.CO;2-C
p. 525-542

Robert F. Engle, Takatoshi Ito, Wen-Ling Lin

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.