Trading Price Jump Clusters in Foreign Exchange Markets

Novotny, J., Petrov, D. & Urga, G. (2015). Trading Price Jump Clusters in Foreign Exchange Markets. Journal of Financial Markets, 24, pp. 66-92. doi: 10.1016/j.finmar.2015.03.002

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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.

Item Type: Article
Additional Information: © 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International
Uncontrolled Keywords: Price jumps; Clusters; Foreign exchange markets; Trading; Profitable strategy
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance

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