“Identifying the Common Jump Component in Foreign Exchange Returns” by Wing CHAN
Wilfrid Laurier University
This paper develops a bivariate conditional jump model to study jump dynamics in foreign exchange returns. We propose a simple common jump structure with time-varying jump intensities and jump sizes. This permits extraction of an unique shock component that is common to both Deutsche mark and Japanese yen. The model allows the conditional jump intensity to be time-varying and follows an approximate ARMA form. An asymmetric effect of lagged returns on common jump component is captured by a time-varying structure in the jumps sizes. The time-series characteristics of daily foreign exchange returns are analyzed using the jump model coupled with a BEKK-GARCH specification of volatility. We find significant time-variation in the conditional jump intensity and evidence of common jump component in both currencies.