Abstract
This paper characterizes the intraday dynamics of the high frequency US Dollar (USD)–Euro (EUR) and US Dollar (USD)–Japanese Yen (JPY) foreign exchange rates that have been subject to macroeconomic fundamentals. Even though the FIGARCH model with a normality assumption is found to be a good starting point, it appears to be inappropriate to represent the underlying movements of the high frequency returns due to the occurrences of jumps. Hence, this paper relies on the FIGARCH model with the mixture distribution that allows for the time-varying jumps that are determined by the US macroeconomic surprises. This paper generally finds that the US macroeconomic surprises are closely related to the intraday movements in the volatility process of the high frequency returns process through the jumps. In particular, the US macroeconomic surprises appear to affect the movements in the volatility process of the foreign exchange rates asymmetrically depending on the signs of the surprises and spuriously increasing the long memory persistence in the volatility process due to the jumps.
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