Risk, Jumps, and Diversification

CREATES Research Paper 2007-19

48 Pages Posted: 23 Jun 2008

See all articles by Tim Bollerslev

Tim Bollerslev

Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Tzuo Hann Law

affiliation not provided to SSRN

George Tauchen

Duke University - Economics Group

Date Written: August 16, 2007

Abstract

We test for price discontinuities, or jumps, in a panel of high-frequency intraday returns for forty large-cap stocks and an equiweighted index from these same stocks. Jumps are naturally classified into two types: common and idiosyncratic. Common jumps affect all stocks, albeit to varying degrees, while idiosyncratic jumps are stock-specific. Despite the fact that each of the stocks has a b of about unity with respect to the index, common jumps are virtually never detected in the individual stocks. This is truly puzzling, as an index can jump only if one or more of its components jump. To resolve this puzzle, we propose a new test for cojumps. Using this new test we find strong evidence for many modest-sized common jumps that simply pass through the standard jump detection statistic, while they appear highly significant in the cross section based on the new cojump identification scheme. Our results are further corroborated by a striking within-day pattern in the non-diversifiable cojumps.

Keywords: risk, diversification

JEL Classification: C12, C32, C33, G12, G14

Suggested Citation

Bollerslev, Tim and Law, Tzuo Hann and Tauchen, George E., Risk, Jumps, and Diversification (August 16, 2007). CREATES Research Paper 2007-19. Available at SSRN: https://ssrn.com/abstract=1150071 or http://dx.doi.org/10.2139/ssrn.1150071

Tim Bollerslev (Contact Author)

Duke University - Finance ( email )

Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tzuo Hann Law

affiliation not provided to SSRN

George E. Tauchen

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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