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Fearghal Kearney, Han Lin Shang, Yuqian Zhao
[stat.ME,stat.AP]
Forecasting intraday foreign exchange volatility with functional GARCH approaches
Fearghal Kearney, Han Lin Shang, Yuqian Zhao
[stat.ME,stat.AP]
This paper seeks to analyse and predict conditional intraday volatility curves in FX markets using functional Generalised AutoRegressive Conditional Heteroscedasticity (GARCH) models. Remarkably, taking account of cross-dependency dynamics between the major currencies significantly improves intraday conditional volatility forecasting. Additionally, incorporating intraday bid-ask spread using a functional GARCH-X model further enhances predictability. 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.