Do Co-Jumps Impact Correlations in Currency Markets?

Abstract

We quantify how co-jumps impact correlations in currency markets. To disentangle the continuous part of quadratic covariation from co-jumps, and study the influence of co-jumps on correlations, we propose a new wavelet-based estimator. The proposed estimation framework is able to localize the co-jumps very precisely through wavelet coefficients and identify statistically significant co-jumps. Empirical findings reveal the different behaviors of co-jumps during Asian, European and U.S. trading sessions. Importantly, we document that co-jumps significantly influence correlation in currency markets.

Asymmetric interdependence between currency markets' volatilities across frequencies and time scales

“…Moreover, currencies with greater liquidity (measured by trading volume) tend to more quickly recover their price stability. Using a novel jump wavelet covariance estimator, Barunik and Vacha (2018) quantify the impact of co‐jumps on currency markets' correlations. The authors identify a variety of impact behaviour from co‐jumps on the currencies modelled during the Asian, European, and U.S. trading sessions.…”

How Successful Are Wavelets in Detecting Jumps?

“…Moreover, the use of a maximum overlap discrete wavelet transformation rather than a discrete wavelet transformation, as in [12], enabled them to provide an exact point estimate of the jump location. Moreover, Barunik and Vacha [14] implemented wavelet-based jump localization techniques in multivariate asset price processes showing that wavelets are very useful in detection and localization of the co-jumps in the multivariate data.…”