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

Abstract

This paper defines and tests a form of merket efficiency called narket dexterity which requires that asset prices adjust instantaneously and completely in response to new infornation.Examining the behavior of the yen/dollar exchange rate while each of the nmjor narkets are open it is possible to test for informetional effects from one narket to the next.Assuming that news has only country specific autocorrelation such as a heat wave, any intra-daily volatility spillovers (meteor showers) become evidence against nnrket dexterity.ARQi models are employed to model heteroskedasticity across intra-daily narket segments.Statistical tests lead to the rejection of the heat wave and therefore the mrket dexterity hypothesis.Using a volatility type of vector autoregression we examine the impact of news in one narket on the time path of volatility in other merkets.