Dynamics of return and liquidity (co) jumps in emerging foreign exchange markets

Abstract

We investigate the dynamics of return and liquidity (co)jumps for three of the most traded emerging market currencies vis-à-vis US dollar. We find that an increase in the average bid-ask spread significantly reduces the duration between consecutive return jumps, while liquidity and volatility only play a partial role on the duration between consecutive liquidity jumps and return-liquidity cojumps. There is also evidence of vicious return-liquidity spirals in views of the positive contemporaneous impact of liquidity jumps on volatility and return jumps on the bid-ask spread. Moreover, scheduled macroeconomic news and central bank announcements increase the likelihood of both return and liquidity (co)jumps. Finally, jump adjusted high frequency FX trading strategies are shown to have superior performance over the buy-and-hold strategy.

Jump forecasting in foreign exchange markets: A high‐frequency analysis

“…Piccotti (2018), by analyzing the FX market, finds that before jumps and cojumps, exchange rates have greater illiquidity, greater jumpsigned order flow, and greater jump-signed cumulative abnormal returns. Serdengecti et al (2021) analyze the return and liquidity jumps for the most traded emerging market FX rates and demonstrate that increase in the bid-ask spread reduces the duration between consecutive return jump. T A B L E A 7 Summary of binary classification results.…”

What Factors Affect the RMB Carry Trade Return for Sustainability? An Empirical Analysis by Using an ARDL Model

“…The impact of the liquidity variable on the exchange-rate market and the carry trade is extensively discussed in the literature [17,[41][42][43][44]. Additionally, other variables are proved to be an explanatory factor of currency return, such as country-specific fundamental volatility, unemployment [1], consumption growth [45], and the developed-country average discount of forward [31].…”