A GEOGRAPHICAL MODEL FOR THE DAILY AND WEEKLY SEASONAL VOLATILITY IN THE FOREIGN-EXCHANGE MARKET

The daily and weekly seasonality of foreign exchange volatility is modeled by introducing an activity variable. This activity is explained by a simple model of the changing and sometimes overlapping market presence of geographical components (East Asia, Europe, and America). Integrating this activity over time results in the new 9 time scale, characterized by non-seasonal volatility. This scale, applied to dense datastreams of absolute price changes, succeeds in removing most of the seasonal heteroscedasticity in an autocorrelation study. Unexpectedly, the positive autocorrelation is found to decline hyperbolically rather than exponentially as a function of the lag.