The Complexity of Jump Dynamics in Cryptocurrencies and Forex Markets: A Multifractal Cross-Correlation Framework

Abstract

Jumps in financial markets play a crucial role in disrupting financial systems, influencing trading behavior, and increasing market complexity. This study aims to quantify how jumps in decentralized markets have cross-correlation properties with centralized financial markets, particularly in multifractal context. We employ high frequency data from six major cryptocurrencies and six major forex markets at 5-minute intervals for the period of Aug 04, 2019 - Jul 27, 2024. We first extract daily jumps by using the MinRV-based jump method and employ multifractal detrended cross-correlation analysis (MF-DXA, also known as MF-DCCA) on jumps to understand their interconnected dynamics. The findings indicate all 36 pairs of jumps between cryptocurrencies and forex markets to have significant multifractality in cross-correlation. However, the strength of multifractal cross-correlation varies significantly across all combinations. Notably, all cryptocurrencies exhibit stronger cross-correlations with Japanese Yen, and weaker with Australian Dollar and British Pound. In addition, all the pairs of jumps have persistence behavior in the cross-correlation indicating the likelihood of positive/negative jumps in one market often propagate positive/negative jumps in another market. These findings offer valuable insights for market participants, investors and policymakers in making informed investment decisions, developing risk adjusted trading strategies, and enhancing efficiency in financial markets.

        Keywords: jumps; co-jumps; multifractality; MF-DCCA; cryptocurrencies; forex exchange rates