Modeling foreign exchange rates with jumps

John M. Maheu () and Thomas McCurdy

Working Papers from University of Toronto, Department of Economics

Abstract: We propose a new discrete-time model of returns in which jumps capture persistence in the conditional variance and higher-order moments. Jump arrival is governed by a heterogeneous Poisson process. The intensity is directed by a latent stochastic autoregressive process, while the jump-size distribution allows for conditional heteroskedasticity. Model evaluation focuses on the dynamics of the conditional distribution of returns using density and variance forecasts. Predictive likelihoods provide a period-by-period comparison of the performance of our heterogeneous jump model relative to conventional SV and GARCH models. Further, in contrast to previous studies on the importance of jumps, we utilize realized volatility to assess out-of-sample variance forecasts.

Keywords: jump clustering; jump dynamics; MCMC; predictive likelihood; realized volatility; Bayesian model average (search for similar items in EconPapers)
JEL-codes: C22 C11 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-for, nep-ifn and nep-mst
Date: 2007-02-02
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