Finance

Physics

Accounting

Crash

Capital formation

Financial economics

Liberian dollar

World Wide Web

Currency

Econometrics

Economics

Foreign exchange risk

Variance risk premium

Microeconomics

Profit (economics)

Variance (accounting)

Programming language

Index (typography)

Exchange rate

Computer science

Volatility risk premium

Jump

Monetary economics

Quantum mechanics

Financial capital

Stochastic volatility

Volatility (finance)

Depreciation (economics)

Journal of Financial and Quantitative Analysis

We develop an empirical model of bilateral exchange rates. It includes normal shocks with stochastic variance and jumps in an exchange rate and in its variance. The probability of a jump in an exchange rate corresponding to depreciation (appreciation) of the U.S. dollar is increasing in the domestic (foreign) interest rate. The probability of a jump in variance is increasing in the variance only. Jumps in exchange rates are associated with announcements; jumps in variance are not. On average, jumps account for 25% of currency risk. The dollar carry index retains these features. Options suggest that jump risk is priced.

Crash Risk in Currency Returns