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Do Jumps and Co-jumps Improve Volatility Forecasting of Oil and Currency Markets?

This paper aims at modeling and forecasting volatility in both oil and USD exchange rate markets using high frequency data. We test whether extreme co-movements (co-jumps) between these markets, as well as intraday unexpected news, help to improve volatility forecasting or not. Accordingly, we propose different extensions of Corsi (2009)'s model by including co-jumps and news. Our analysis provides two interesting findings. First, we find that both markets exhibit significant co-jumps driven by unexpected macroeconomic news. Second, we show that our model outperforms Corsi (2009)'s model and provides more accurate forecasts. In particular, while co-jumps constitute a key variable in forecasting oil price volatility, the unexpected news is relevant to forecasts of USD exchange rate volatility.

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Keywords: Volatility, Oil price, U.S. dollar exchange rate, Co-jumps, Forecasts

DOI: 10.5547/01956574.40.SI2.fjaw

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Published in Volume 40, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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