Jump Activity Analysis for Affine Jump-Diffusion Models: Evidences from the Commodity Market

33 Pages Posted: 1 May 2016

See all articles by José Da Fonseca

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law

Katja Ignatieva

University of New South Wales - Australian School of Business

Date Written: May 1, 2016

Abstract

The objective of this paper is to perform a joint analysis of jump activity for commodities and their respective volatility indices. Exploiting the property that for affine jump-diffusion models a volatility index, which is quoted on the market, is an affine function of the instantaneous volatility state variable (thus turning this quantity observable), we perform a test of common jumps for multidimensional processes to assess whether an asset and its volatility jump together. Applying this test to the crude oil pair USO/OVX and the gold pair GLD/GVZ we find strong evidence that for these two markets the asset and its volatility have disjoint jumps. This result contrasts with existing results for the equity market and underpins a very specific nature of the commodity market. The results are further confirmed by analysing jump size distributions using a copula methodology.

Keywords: Affine jump-diffusion models, Volatility indices, Jump activity, Model specification

JEL Classification: G12, G13, C14

Suggested Citation

Da Fonseca, José and Ignatieva, Katja, Jump Activity Analysis for Affine Jump-Diffusion Models: Evidences from the Commodity Market (May 1, 2016). Available at SSRN: https://ssrn.com/abstract=2773076 or http://dx.doi.org/10.2139/ssrn.2773076

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand
64 9 921 9999 5063 (Phone)

Katja Ignatieva (Contact Author)

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

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