The Role of Jumps in Volatility Spillovers in Foreign Exchange Markets: Meteor Shower and Heat Waves Revisited. Issue 2 (2nd April 2020)

• Record Type: Journal Article
• Authors: Lahaye, Jérôme; Neely, Christopher
• Is Part Of: Journal of business & economic statistics. Volume 38:Issue 2(2020)
• Page Start: 410
• Page End: 427
• Publication Date: 2020-04-02
• Subjects: Exchange rate -- Heat wave -- Meteor shower -- Jumps -- Volatility; Economics -- Statistical methods -- Periodicals; Commercial statistics -- Periodicals; Économie politique -- Méthodes statistiques -- Périodiques; Statistique commerciale -- Périodiques; 330.015195
• DOI: 10.1080/07350015.2018.1512865
• Languages: English
• ISSNs: 0735-0015

Abstract

ABSTRACT: This article extends the literature on geographic (heat waves) and intertemporal (meteor showers) foreign exchange volatility transmission to characterize the role of jumps and cross-rate propagation. We employ multivariate heterogenous autoregressive (HAR) models to capture the quasi-long memory properties of volatility and both Shapley–Owen R 2 's and portfolio optimization exercises to quantify the contributions of information sets. We conclude that meteor showers (MS) are substantially more influential than heat waves (HW), that jumps play a modest but significant role in volatility transmission, that cross-market propagation of volatility is important, and that allowing for differential HW and MS effects and differential parameters across intraday market segments is valuable. Finally, we illustrate what types of news weaken or strengthen heat wave, meteor shower, continuous, and jump patterns with sensitivity analysis. Supplementary materials for this article are available online.