Asymmetric volatility in the foreign exchange markets

We examine the presence or absence of asymmetric volatility in the exchange rates of Australian dollar (AUD), Euro (EUR), British pound (GBP) and Japanese yen (JPY), all against US dollar. Our investigation is based on a variant of the heterogeneous autoregressive realized volatility model, using daily realized variance and return series from 1996 to 2004. We find that a depreciation against USD leads to significantly greater volatility than an appreciation for AUD and GBP, whereas the opposite is true for JPY. Relative to volatility on days following a positive one-standard-deviation return, volatility on days following a negative one-standard-deviation return is higher by 6.6% for AUD, 6.1% for GBP, and 21.2% for JPY. The realized volatility of EUR appears to be symmetric. These results are robust to the removal of jump component from realized volatility and the sub-samplings defined by structural-changes. The asymmetry in AUD, GBP and JPY appears to be embedded in the continuous component of realized volatility rather than the jump component.