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Modeling foreign exchange rates with jumps

Author

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  • John M Maheu
  • Thomas H McCurdy

Abstract

We propose a new discrete-time model of returns in which jumps capture persistence in the conditional variance and higher-order moments. Jump arrival is governed by a heterogeneous Poisson process. The intensity is directed by a latent stochastic autoregressive process, while the jump-size distribution allows for conditional heteroskedasticity. Model evaluation focuses on the dynamics of the conditional distribution of returns using density and variance forecasts. Predictive likelihoods provide a period-by-period comparison of the performance of our heterogeneous jump model relative to conventional SV and GARCH models. Further, in contrast to previous studies on the importance of jumps, we utilize realized volatility to assess out-of-sample variance forecasts.

Suggested Citation

  • John M Maheu & Thomas H McCurdy, 2007. "Modeling foreign exchange rates with jumps," Working Papers tecipa-279, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-279
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Peter Christoffersen & Kris Jacobs & Chayawat Ornthanalai, 2009. "Exploring Time-Varying Jump Intensities: Evidence from S&P500 Returns and Options," CIRANO Working Papers 2009s-34, CIRANO.
    2. Park, Beum-Jo, 2010. "Surprising information, the MDH, and the relationship between volatility and trading volume," Journal of Financial Markets, Elsevier, vol. 13(3), pages 344-366, August.

    More about this item

    Keywords

    jump clustering; jump dynamics; MCMC; predictive likelihood; realized volatility; Bayesian model average;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G1 - Financial Economics - - General Financial Markets

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