Exchange Rate Jumps and Geopolitical Risks

We study the causal relation as well as the Granger-causality and causality-in-quantiles of geopolitical risks in foreign exchange (FX) price jumps, for the period that spans from July 1, 2003, to August 28, 2015. Extended series of different currencies and quantiles are investigated considering seven exchange rates (i) Australian Dollar (AUD), (ii) British Pound (GBP), (iii) Euro (EUR), (iv) New Zealand Dollar (NZD), (v) Canadian Dollar (CAD), (vi) Japanese Yen (JPY) and (vii) Swiss Franc (CHF). We show that geopolitical risks (GPRs) help to predict FX jumps as our results demonstrate a statistically significant and of considerable magnitude relation between geopolitical risks and jumps in the foreign exchange market. The acts of geopolitical risk more severely cause FX total, upside and downside jumps; with the threats of geopolitical risk second, and the geopolitical risk last. In the highest quantiles, NZD is the currency with the highest causalities between geopolitical risks and FX jumps; the highest and lowest causalities are for geopolitical risk (GPR) and geopolitical acts (GPA), respectively. Moreover, the GPR has the highest dispersion of causalities for all FX jumps.