2023/11/30 by Fearghal Kearney, Han Lin Shang, Kearney, Fearghal +3
Economics, Econometrics and Finance · #62R10 #Applications (stat.AP) #FOS: Computer and information sciences #Financial Risk and Volatility Modeling #Market Dynamics and Volatility #Methodology (stat.ME) #Monetary Policy and Economic Impact
paper · pdf · doi:10.48550/arxiv.2311.18477
openalex publication_date 2023/11/30 · openalex created_date 2023/12/02 · openalex updated_date 2026/07/28
This paper seeks to forecast intraday volatility curves for major foreign exchange (FX) currencies using functional GARCH models. Intraday return curves are observed at a daily frequency, yet preserve the full high-frequency trading structure, enabling volatility analysis at the intraday level. We demonstrate that the USD/EUR, USD/GBP, and USD/JPY intraday return curves exhibit strong cross-dependence, while individually they are serially uncorrelated but display long-range conditional heteroskedasticity. Embedding cross-currency dependence via multi-level functional principal component analysis and adding intraday bid-ask spread curves as exogenous drivers significantly improves intraday and day-ahead volatility forecasts relative to functional and realised-volatility baselines. The precise volatility forecasts motivate the construction of intraday Value-at-Risk (VaR). An intraday risk management application highlights that predicted intraday VaR curves can help mitigate dramatic losses in intraday trading strategies, showcasing their practical economic benefits in FX markets.