Currency jumps, Euribor-OIS spreads and the volatility skew: A study on the dollar-euro crash risk of 2007–2015

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Abstract

This paper examines the Euribor-OIS spread and volatility skew as future indicators of the euro jumps triggered by crash events during the European financial crises of 2007–2015. The overall result reveals that the Euribor-OIS spread is capable of generating statistically and economically significant predictions of euro jumps that occur during the crises. Volatility skew is also found to be informative about future jumps but the marginal effect of jump predictions is relatively small. Further, pre-crises jumps are not accurately predicted by either indicator, suggesting that adverse information flow over the sample period is transitory.

Original languageEnglish
Pages (from-to)7-16
Number of pages10
JournalFinance Research Letters
Volume29
DOIs
Publication statusPublished - Jun 2019

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Jump
Crash
Currency
Prediction
Information flow
Financial crisis
Marginal effects

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title = "Currency jumps, Euribor-OIS spreads and the volatility skew: A study on the dollar-euro crash risk of 2007–2015",
abstract = "This paper examines the Euribor-OIS spread and volatility skew as future indicators of the euro jumps triggered by crash events during the European financial crises of 2007–2015. The overall result reveals that the Euribor-OIS spread is capable of generating statistically and economically significant predictions of euro jumps that occur during the crises. Volatility skew is also found to be informative about future jumps but the marginal effect of jump predictions is relatively small. Further, pre-crises jumps are not accurately predicted by either indicator, suggesting that adverse information flow over the sample period is transitory.",
keywords = "Euribor-OIS spreads, Jumps in exchange rates, Volatility skew",
author = "Alfred Wong",
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AB - This paper examines the Euribor-OIS spread and volatility skew as future indicators of the euro jumps triggered by crash events during the European financial crises of 2007–2015. The overall result reveals that the Euribor-OIS spread is capable of generating statistically and economically significant predictions of euro jumps that occur during the crises. Volatility skew is also found to be informative about future jumps but the marginal effect of jump predictions is relatively small. Further, pre-crises jumps are not accurately predicted by either indicator, suggesting that adverse information flow over the sample period is transitory.

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