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Federal Reserve Bank of St. Louis
Working Papers
The role of jumps in volatility spillovers in foreign exchange markets: meteor shower and heat waves revisited
Jerome Lahaye
Christopher J. Neely
Abstract

This paper extends the previous literature on geographic (heat waves) and intertemporal (meteor showers) foreign exchange volatility transmission to characterize the role of jumps and cross-rate propagation. We employ heterogeneous autoregressive (HAR) models to capture the quasi-long-memory properties of volatility and the Shapley-Owen R2 measure to quantify the contributions of components. We conclude that meteor showers are more influential than heat waves, that jumps play a modest but significant role in volatility transmission and that significant, bidirectional cross-rate volatility transmission exists. Finally, we illustrate what types of news weaken or strengthen heat wave and meteor shower effects with sensitivity analysis.


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Jerome Lahaye & Christopher J. Neely, The role of jumps in volatility spillovers in foreign exchange markets: meteor shower and heat waves revisited, Federal Reserve Bank of St. Louis, Working Papers 2014-34, 01 Oct 2014, revised 19 Sep 2016.
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Keywords: realized; volatility; jumps; transmission; periodicity; intraday; meteor shower; heat wave; exchange rate; euro; yen; dollar.
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