Tales of Tails: Jumps in Currency Markets
68 Pages Posted: 27 Jul 2016
Date Written: July 26, 2016
This paper investigates the predictability of jumps in currency markets and shows the implications for carry trades. Formulating new currency jump analyses, we propose a general method to estimate the determinants of jump sizes and intensities. We employ a large panel of high-frequency data to reveal significant predictive relationships between currency jumps and national fundamentals. In addition, we identify intraday patterns such as multiple currency jump clustering and time-of-day effects. U.S. macroeconomic information releases - particularly FOMC announcements - lead to currency jumps. Using these jump predictors to construct jump-robust carry trades, investors can mitigate the left tail risks.
Keywords: foreign currency, jump robust carry trade, jump prediction, general jump regression
JEL Classification: G15, F31, C14
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