Abstract

http://ssrn.com/abstract=609321
 
 

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The Relative Contribution of Jumps to Total Price Variance


Xin Huang


University of Oklahoma

George Tauchen


Duke University - Economics Group

July 2005


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 seven percent of stock market price variance.

Number of Pages in PDF File: 60

Keywords: Realized variance, quadratic variation, bipower variation, stochastic volatility

JEL Classification: G12, C51, C52

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Date posted: August 24, 2005  

Suggested Citation

Huang, Xin and Tauchen, George, The Relative Contribution of Jumps to Total Price Variance (July 2005). Available at SSRN: http://ssrn.com/abstract=609321 or http://dx.doi.org/10.2139/ssrn.609321

Contact Information

Xin Huang
University of Oklahoma ( email )
Norman, OK 73019
United States
George E. Tauchen (Contact Author)
Duke University - Economics Group ( email )
Box 90097
221 Social Sciences
Durham, NC 27708-0097
United States
919-660-1812 (Phone)
919-684-8974 (Fax)
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References:  46
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