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The role of jumps in volatility spillovers in foreign exchange markets: meteor showers and heat waves revisited

This paper extends the 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 multivariate heterogeneous autoregressive (HAR) models to capture the quasi-long memory properties of volatility and both Shapley-Owen R2s and portfolio optimization exercises to quantify the contributions of information sets. We conclude that meteor showers (MS) are substantially more influential than heat waves (HW), that jumps play a modest but significant role in volatility transmission, that cross market propagation of volatility is important, and that allowing for differential HW and MS effects and differential parameters across intraday market segments is valuable. Finally, we illustrate what types of news weaken or strengthen heat wave, meteor shower, continuous and jump patterns with sensitivity analysis.

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