In this article, we have tested the volatility of the returns of the spot exchange rate of AUD/USD for changing … better explain volatility clusters. We have selected the model with the best forecasting ability in terms of the lowest value …

We develop and implement a new method for maximum likelihood estimation in closed-form of stochastic volatility models … unobservable volatility state, to an approximate likelihood procedure where the volatility state is replaced by the implied … volatility of a short dated at-the-money option. We find that the approximation results in a negligible loss of accuracy. We …