IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v387y2008i26p6575-6583.html
   My bibliography  Save this article

Modeling and estimating the jump risk of exchange rates: Applications to RMB

Author

Listed:
  • Wang, Yiming
  • Tong, Hanfei

Abstract

In this paper we propose a new type of continuous-time stochastic volatility model, SVDJ, for the spot exchange rate of RMB, and other foreign currencies. In the model, we assume that the change of exchange rate can be decomposed into two components. One is the normally small-cope innovation driven by the diffusion motion; the other is a large drop or rise engendered by the Poisson counting process. Furthermore, we develop a MCMC method to estimate our model. Empirical results indicate the significant existence of jumps in the exchange rate. Jump components explain a large proportion of the exchange rate change.

Suggested Citation

  • Wang, Yiming & Tong, Hanfei, 2008. "Modeling and estimating the jump risk of exchange rates: Applications to RMB," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(26), pages 6575-6583.
    • Handle: RePEc:eee:phsmap:v:387:y:2008:i:26:p:6575-6583
    DOI: 10.1016/j.physa.2008.08.017
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437108007164
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2008.08.017?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jun Liu & Francis A. Longstaff & Jun Pan, 2003. "Dynamic Asset Allocation with Event Risk," Journal of Finance, American Finance Association, vol. 58(1), pages 231-259, February.
    2. repec:dau:papers:123456789/1380 is not listed on IDEAS
    3. Michael J. Brennan & Yihong Xia, 2006. "International Capital Markets and Foreign Exchange Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 753-795.
    4. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    5. Peter Carr & Hélyette Geman & Dilip B. Madan & Marc Yor, 2007. "Self‐Decomposability And Option Pricing," Mathematical Finance, Wiley Blackwell, vol. 17(1), pages 31-57, January.
    6. John M. Maheu & Thomas McCurdy, 2003. "News Arrival, Jump Dynamics and Volatility Components for Individual Stock Returns," CIRANO Working Papers 2003s-38, CIRANO.
    7. Helyette Geman & C. Peter M. Dilip Y. Marc, 2007. "Self decomposability and option pricing," Post-Print halshs-00144193, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cristescu, C.P. & Stan, C. & Scarlat, E.I., 2009. "The dynamics of exchange rate time series and the chaos game," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(23), pages 4845-4855.
    2. Rodríguez Nava Abigail & Francisco Venegas Martínez, 2010. "Efectos del tipo de cambio sobre el déficit público: modelos de simulación Monte Carlo," Contaduría y Administración, Accounting and Management, vol. 55(3), pages 11-40, septiembr.
    3. Li, Xiao-Ping & Feng, Yun & Wu, Chong-Feng & Xu, Wei-Dong, 2013. "Response of the term structure of forward exchange rate to jump in the interest rate," Economic Modelling, Elsevier, vol. 30(C), pages 863-874.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ballotta, Laura & Rayée, Grégory, 2022. "Smiles & smirks: Volatility and leverage by jumps," European Journal of Operational Research, Elsevier, vol. 298(3), pages 1145-1161.
    2. Tim Bollerslev & Sophia Zhengzi Li & Viktor Todorov, 2014. "Roughing up Beta: Continuous vs. Discontinuous Betas, and the Cross-Section of Expected Stock Returns," CREATES Research Papers 2014-48, Department of Economics and Business Economics, Aarhus University.
    3. Christensen, Kim & Oomen, Roel C.A. & Podolskij, Mark, 2014. "Fact or friction: Jumps at ultra high frequency," Journal of Financial Economics, Elsevier, vol. 114(3), pages 576-599.
    4. Chernov, Mikhail & Graveline, Jeremy & Zviadadze, Irina, 2018. "Crash Risk in Currency Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(1), pages 137-170, February.
    5. Li, Chenxu & Chen, Dachuan, 2016. "Estimating jump–diffusions using closed-form likelihood expansions," Journal of Econometrics, Elsevier, vol. 195(1), pages 51-70.
    6. N. Hilber & N. Reich & C. Schwab & C. Winter, 2009. "Numerical methods for Lévy processes," Finance and Stochastics, Springer, vol. 13(4), pages 471-500, September.
    7. Hanousek Jan & Kočenda Evžen & Novotný Jan, 2012. "The identification of price jumps," Monte Carlo Methods and Applications, De Gruyter, vol. 18(1), pages 53-77, January.
    8. Liu, Jun & Pan, Jun, 2003. "Dynamic derivative strategies," Journal of Financial Economics, Elsevier, vol. 69(3), pages 401-430, September.
    9. Gourieroux, C. & Monfort, A. & Sufana, R., 2010. "International money and stock market contingent claims," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1727-1751, December.
    10. Patrizia Semeraro, 2022. "Multivariate tempered stable additive subordination for financial models," Mathematics and Financial Economics, Springer, volume 16, number 3, December.
    11. Dilip B. Madan & King Wang, 2022. "Two sided efficient frontiers at multiple time horizons," Annals of Finance, Springer, vol. 18(3), pages 327-353, September.
    12. Albrecher, Hansjoerg & Guillaume, Florence & Schoutens, Wim, 2013. "Implied liquidity: Model sensitivity," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 48-67.
    13. Yi-Hao Lai & Yi-Chiuan Wang & Wei-Shih Chung, 2018. "Initial Jump and Recovering Jump in the S&P 500 Index Returns: A Jump-Recovering-Switching Approach," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 14(1), pages 51-66, February.
    14. Chenxu Li & Olivier Scaillet & Yiwen Shen, 2020. "Wealth Effect on Portfolio Allocation in Incomplete Markets," Papers 2004.10096, arXiv.org, revised Aug 2021.
    15. repec:wyi:journl:002108 is not listed on IDEAS
    16. Wujun Lv & Tao Pang & Xiaobao Xia & Jingzhou Yan, 2023. "Dynamic portfolio choice with uncertain rare-events risk in stock and cryptocurrency markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-28, December.
    17. Dilip Madan, 2011. "Joint risk-neutral laws and hedging," IISE Transactions, Taylor & Francis Journals, vol. 43(12), pages 840-850.
    18. Hong, Yi & Jin, Xing, 2022. "Pricing of variance swap rates and investment decisions of variance swaps: Evidence from a three-factor model," European Journal of Operational Research, Elsevier, vol. 303(2), pages 975-985.
    19. Du Du & Heng-fu Zou, 2008. "Intertemporal Portfolio Choice under Multiple Types of Event Risks," CEMA Working Papers 332, China Economics and Management Academy, Central University of Finance and Economics.
    20. Tim Bollerslev & Viktor Todorov, 2011. "Tails, Fears, and Risk Premia," Journal of Finance, American Finance Association, vol. 66(6), pages 2165-2211, December.
    21. Patrizia Semeraro, 2021. "Multivariate tempered stable additive subordination for financial models," Papers 2105.00844, arXiv.org, revised Sep 2021.

    More about this item

    Keywords

    Jump risk; MCMC; SVDJ model;
    All these keywords.

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:387:y:2008:i:26:p:6575-6583. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.