Do co-jumps impact correlations in currency markets?

TL;DR

This paper introduces a wavelet-based estimator to precisely identify co-jumps in currency markets and demonstrates their significant influence on market correlations across different trading sessions.

Contribution

It proposes a novel wavelet-based method to accurately detect co-jumps and analyze their impact on currency market correlations.

Findings

Co-jumps vary across Asian, European, and U.S. trading sessions.

Co-jumps significantly affect currency market correlations.

The new estimator effectively localizes co-jumps using wavelet coefficients.

Abstract

We quantify how co-jumps impact correlations in currency markets. To disentangle the continuous part of quadratic covariation from co-jumps, and study the influence of co-jumps on correlations, we propose a new wavelet-based estimator. The proposed estimation framework is able to localize the co-jumps very precisely through wavelet coefficients and identify statistically significant co-jumps. Empirical findings reveal the different behaviors of co-jumps during Asian, European and U.S. trading sessions. Importantly, we document that co-jumps significantly influence correlation in currency markets.