Trading price jump clusters in foreign exchange markets

Jan Novotný, Dmitri Petrov and Giovanni Urga

Journal of Financial Markets, 2015, vol. 24, issue C, 66-92

Abstract: We investigate trading opportunities of price jump clusters in the FX markets. We identify clusters for eight FX rates against the U.S. dollar from March 1, 2013 to June 6, 2013 sampled at a 5-minute frequency. We propose a high-frequency jump cluster-based trading strategy and show that jumps carry a tradable signal for all currencies; however, when incorporating the bid-ask spread, the only profitable currencies are the euro, yen and rand. From the portfolio perspective, a combination of the euro and yen represents a strategy robust to the holding period, minimizes the transaction costs, and diversifies out the U.S.-related risk.

Keywords: Price jumps; Clusters; Foreign exchange markets; Trading; Profitable strategy (search for similar items in EconPapers)
JEL-codes: C58 F31 G11 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:24:y:2015:i:c:p:66-92

DOI: 10.1016/j.finmar.2015.03.002

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