Jumps, Cojumps, and Efficiency in the Spot Foreign Exchange Market

Abstract

I identify intraday jumps and cojumps in exchange rates controlling for volatility patterns and relate these events to pre-scheduled macroeconomic news and market conditions. Event study results show that preceding jump and cojump events, exchange rate quote volume, illiquidity, signed order flow, and informed trades are at heightened levels revealing that jump events are consistent with rational dealer quoting behavior. Following jump and cojump events, quote volume and return variance remain at heightened levels while illiquidity, informed trade, and signed order flow remain at depressed levels providing evidence that order flow following jump events is largely uninformed liquidity provision.

Keywords: Jumps, Cojumps, Foreign exchange market, Market efficiency, Stochastic volatility bias

JEL Classification: G12, G14, G15