The distribution of realized exchange rate volatility

Using high-frequency data on deutschemark and yen returns against the dolla r, we construct model-free estimates of daily exchange rate volatility and correlation that cover an entire decade. Our estimates, termed realized vol atilities and correlations, are not only model-free, but also approximately free of measurement error under general conditions, which we discuss in de tail. Hence, for practical purposes, we may treat the exchange rate volatil ities and correlations as observed rather than latent. We do so, and we cha racterize their joint distribution. both unconditionally and conditionally. Noteworthy results include a simple normality-inducing volatility transfor mation, high contemporaneous correlation across volatilities, high correlat ion between correlation and volatilities, pronounced and persistent dynamic s in volatilities and correlations. evidence of long-memory dynamics in vol atilities and correlations, and remarkably precise scaling laws under tempo ral aggregation.