The Distribution of Exchange Rate Volatility* Torben G. Andersena, Tim Bollerslevb, Francis X. Dieboldc and Paul Labysd November 1998 This Version: November 2, 1999 Abstract Using high-frequency data on Deutschemark and Yen returns against the dollar, we construct model-free estimates of daily exchange rate volatility and correlation, covering an entire decade. In addition to being model-free, our estimates are also approximately free of measurement error under general conditions, which we delineate. Hence, for all practical purposes, we can treat the exchange rate volatilities and correlations as observed rather than latent. We do so, and we characterize their joint distribution, both unconditionally and conditionally. Noteworthy results include a simple normality-inducing volatility transformation, high contemporaneous correlation across volatilities, high correlation between correlation and volatilities, pronounced and highly persistent temporal variation in both volatilities and correlation, clear evidence of long-memory dynamics in both volatilities and correlation, and remarkably precise scaling laws under temporal aggregation. Key Words: Financial Market Volatility; High-Frequency Data; Realized Volatility; Quadratic Variation; Exchange Rates; Long-Memory. __________________ * This work was supported by the National Science Foundation. We are grate
