Sign Effects of Volatility and Jumps in Forex Markets and a Reappraisal of Meteor Showers and Heat Waves

Abstract

We evaluate the impact of signed realized semivariances and jumps, in the evolution of the volatility of exchange rates w.r.t leading currencies the US Dollar, the Euro, the UK Pound and the Japanese Yen using high frequency 5-minute interval data. We re-examine the meteor shower and heat wave hypotheses for four trading time zones i.e., New York, Tokyo and Sydney, London only and London and NY jointly. We find short-run asymmetries in the effect of positive and negative semivariances. Meteor showers exist when trading takes place between London and NY and from NY to Tokyo and Sydney and are profound for bad volatility. Jump variations influence the future volatility of the time zones where they originate.

Keywords: Forex markets, good and bad volatility, signed jumps, meteor showers, heat waves

JEL Classification: F31, G15