Heliyon (Oct 2022)
The jump dynamics of foreign exchange rates: how reliable and consistent are the results of widely utilized jump detection procedures
Abstract
This paper investigates the jump dynamics of foreign exchange rates utilizing Barnsdorff-Nielsen and Shepherd (BNS) and Ait-Sahalia Jacob (AJ) jump detection procedures. The sample includes the nine major exchange rates of the world as well as two exchange rates from an emerging market (Turkey). The observation period is from January 1, 2010 to December 31, 2016. The number of jumps, number of jump days, average jump sizes and the ratio of negative (positive) jumps to total jumps of that observation period are estimated by BNS and AJ methods and the results are reported separately for five different sampled frequencies. The empirical results strongly suggest that jump dynamics of each exchange rate is quite unique and different from the others rather than displaying common patterns. A major result is the extreme sensitivity of the results to the chosen sampled frequencies which raises serious questions about the practical value of these tests for the investors. The paper by utilizing Event Study Analysis also shows that the foreign exchange rate jumps are related to scheduled macroeconomic news announcements.
