Modelling Australian Dollar Volatility at Multiple Horizons with High-Frequency Data

Modelling Australian Dollar Volatility at Multiple Horizons with High-Frequency Data

Long Hai Vo;Duc Hong Vo;Vo, Long Hai;Vo, Duc Hong;
risks 2020 Vol. 8 pp. 89-
118
vo2020risksmodelling

Abstract

Long-range dependency of the volatility of exchange-rate time series plays a crucial role in the evaluation of exchange-rate risks, in particular for the commodity currencies. The Australian dollar is currently holding the fifth rank in the global top 10 most frequently traded currencies. The popularity of the Aussie dollar among currency traders belongs to the so-called three G’s—Geology, Geography and Government policy. The Australian economy is largely driven by commodities. The strength of the Australian dollar is counter-cyclical relative to other currencies and ties proximately to the geographical, commercial linkage with Asia and the commodity cycle. As such, we consider that the Australian dollar presents strong characteristics of the commodity currency. In this study, we provide an examination of the Australian dollar–US dollar rates. For the period from 18:05, 7th August 2019 to 9:25, 16th September 2019 with a total of 8481 observations, a wavelet-based approach that allows for modelling long-memory characteristics of this currency pair at different trading horizons is used in our analysis. Findings from our analysis indicate that long-range dependence in volatility is observed and it is persistent across horizons. However, this long-range dependence in volatility is most prominent at the horizon longer than daily. Policy implications have emerged based on the findings of this paper in relation to the important determinant of volatility dynamics, which can be incorporated in optimal trading strategies and policy implications.

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