Trading price jump clusters in foreign exchange markets

0455373 - NHU-C 2016 RIV NL eng J - Journal Article
Novotný, Jan - Petrov, D. - Urga, G.
Trading price jump clusters in foreign exchange markets.
Journal of Financial Markets. Roč. 24, June (2015), s. 66-92. ISSN 1386-4181. E-ISSN 1878-576X
Institutional support: PRVOUK-P23
Keywords : price jumps * foreign exchange markets * trading
Subject RIV: AH - Economics
Impact factor: 1.726, year: 2015

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.
Permanent Link: http://hdl.handle.net/11104/0255996