Detecting Jumps amidst Prevalent Zero Returns: Evidence from the U.S. Treasury Securities
62 Pages Posted: 12 Nov 2018 Last revised: 31 Aug 2021
Date Written: August 9, 2019
Abstract
We document that each day the U.S. Treasury notes have a large proportion of zero returns, because the vast majority of trades are executed at the best ask/bid quotes and spreads are mostly set close to the minimum tick. The proportion of zero returns is negatively correlated with traditional illiquidity measures. Given the distinctive feature (frequent zero returns), conventional jump-detection methods are vulnerable to biases, leading to falsely identifying jumps. We propose a low-cost solution to the biases, and empirically support the arguments by comparing the identification results using the actual data on the Treasury notes and macro-economic news announcements.
Keywords: U.S. Treasury Notes; Proportions of Zero Returns; Trade Execution; Monte Carlo Simulations; Discrete Price Grids; Combined Jump-Identification Methods
JEL Classification: G12; G14; G17
Suggested Citation: Suggested Citation