Crash Risk in Currency Returns. (15th January 2018)

• Record Type: Journal Article
• Authors: Chernov, Mikhail; Graveline, Jeremy; Zviadadze, Irina
• Is Part Of: Journal of financial and quantitative analysis. Volume 53:Number 1(2018)
• Page Start: 137
• Page End: 170
• Publication Date: 2018-01-15
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109017000801
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract : We develop an empirical model of bilateral exchange rates. It includes normal shocks with stochastic variance and jumps in an exchange rate and in its variance. The probability of a jump in an exchange rate corresponding to depreciation (appreciation) of the U.S. dollar is increasing in the domestic (foreign) interest rate. The probability of a jump in variance is increasing in the variance only. Jumps in exchange rates are associated with announcements; jumps in variance are not. On average, jumps account for 25% of currency risk. The dollar carry index retains these features. Options suggest that jump risk is priced.