Self-Exciting Jumps, Learning, and Asset Pricing Implications

52 Pages Posted: 7 Jan 2012 Last revised: 18 Jun 2014

Andras Fulop

ESSEC Business School

Junye Li

ESSEC Business School

Jun Yu

Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Date Written: June 18, 2014

Abstract

The paper proposes a self-exciting asset pricing model that takes into account co-jumps between prices and volatility and self-exciting jump clustering. We employ a Bayesian learning approach to implement real time sequential analysis. We find evidence of self-exciting jump clustering since the 1987 market crash, and its importance becomes more obvious at the onset of the 2008 global financial crisis. It is found that learning affects the tail behaviors of the return distributions and has important implications for risk management, volatility forecasting and option pricing.

Keywords: Self-Excitation, Jump Clustering, Tail Behaviors, Parameter Learning, Sequential Bayes Factor, Excess Volatility, Volatility Forecasting, Option Pricing

JEL Classification: C11, C13, C32, G12

Suggested Citation

Fulop, Andras and Li, Junye and Yu, Jun, Self-Exciting Jumps, Learning, and Asset Pricing Implications (June 18, 2014). Available at SSRN: https://ssrn.com/abstract=1981024 or http://dx.doi.org/10.2139/ssrn.1981024

Andras Fulop

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

HOME PAGE: http://www.andrasfulop.com

Junye Li (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Jun Yu

Singapore Management University ( email )

90 Stamford Rd
Room 5055
Singapore, 178903
Singapore
+6568280858 (Phone)
+6568280833 (Fax)

HOME PAGE: http://www.mysmu.edu/faculty/yujun/

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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