Volatility and jump with intraday periodicity and truncated power variation in Chinese yuan-US dollar exchange rates

Abstract

ABSTRACT This study analyzes the discrete jump volatility of the Chinese yuan/U.S. dollar exchange rate returns using high-frequency five-minute returns from June 2012 to April 2021. Using periodicity filters of volatility, we conduct volatility jump tests for finite and infinite exchange rate jumps, and the truncated power variation does not exhibit upward or downward jumps. We use combined intraday jump statistics with local robust variance. All empirical results show that if we do not include periodicity filters of volatility, such as MAD and ShortH, the five-minute returns of the Chinese yuan/US dollar exchange rates have much lower intraday jump probabilities. Thus, the volatility and jumps of the Chinese yuan/US dollar ratio will be underestimated if we do not consider the periodicity filters of the volatility in the 2010s. We need to include periodicity filters of volatility and jumps to reduce forecast errors in future Chinese Yuan/US dollar exchange rates so that we obtain a better measure of current volatility and generate better hedging strategies for future volatility.