The Relative Contribution of Jumps to Total Price Variance

The Relative Contribution of Jumps to Total Price Variance We examine tests for jumps based on recent asymptotic results; we interpret the tests as Hausman-type tests. Monte Carlo evidence suggests that the daily ratio z-statistic has appropriate size, good power, and good jump detection capabilities revealed by the confusion matrix comprised of jump classification probabilities. We identify a pitfall in applying the asymptotic approximation over an entire sample. Theoretical and Monte Carlo analysis indicates that microstructure noise biases the tests against detecting jumps, and that a simple lagging strategy corrects the bias. Empirical work documents evidence for jumps that account for 7% of stock market price variance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Econometrics Oxford University Press

The Relative Contribution of Jumps to Total Price Variance

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Publisher
Oxford University Press
Copyright
© The Author 2005. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org.
ISSN
1479-8409
eISSN
1479-8417
D.O.I.
10.1093/jjfinec/nbi025
Publisher site
See Article on Publisher Site

Abstract

We examine tests for jumps based on recent asymptotic results; we interpret the tests as Hausman-type tests. Monte Carlo evidence suggests that the daily ratio z-statistic has appropriate size, good power, and good jump detection capabilities revealed by the confusion matrix comprised of jump classification probabilities. We identify a pitfall in applying the asymptotic approximation over an entire sample. Theoretical and Monte Carlo analysis indicates that microstructure noise biases the tests against detecting jumps, and that a simple lagging strategy corrects the bias. Empirical work documents evidence for jumps that account for 7% of stock market price variance.

Journal

Journal of Financial EconometricsOxford University Press

Published: Aug 12, 2005

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