Abstract
This paper investigates the behavior of the EUR/CZK, EUR/HUF and EUR/PLN spot exchange rates in the period 2002-2008, using 5-minute intraday data. We find that daily returns on the corresponding exchange rates scaled by model-free estimates of daily realized volatility are approximately normally distributed and independent over time.
On the other hand, daily realized variances exhibit substantial positive skewness and very persistent, long-memory type of dynamics. We estimate a simple three-equation model for daily returns, realized variance and the time-varying volatility of realized variance.
The model captures all salient features of the data very well and can be successfully employed for constructing point, as well as density forecasts for future volatility. We also discuss some issues associated with measuring volatility from the noisy high-frequency data and employ a simple correction that accounts for the distortions present in our dataset.