The role of jumps in volatility spillovers in foreign exchange markets: meteor shower and heat waves revisited

We investigate the role of jumps in transmitting volatility between foreign exchange markets (Engle, Ito, and Lin, 1990; Melvin and Peiers Melvin, 2003; Cai, Howorka, and Wongswan, 2008). We show that recently developed estimators have very different implications for the impact of jumps on exchange rate volatility transmission. Specifically, isolated and successive jumps have opposite predictions for future volatility. Although the realized volatility literature finds that heat wave effects prevail for volatility transmission, we find evidence of both meteor shower and heat wave transmission of integrated volatility; in contrast, that jumps operate mainly in a meteor shower fashion. We also demonstrate the EUR/USD volatility and jump shocks spillover to the USD/JPY but the reverse transmission is much weaker.