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

Abstract:
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.