Testing for Mutually Exciting Jumps and Financial Flights in High Frequency Data

84 Pages Posted: 2 Jun 2016 Last revised: 18 Sep 2017

See all articles by Mardi H. Dungey

Mardi H. Dungey

University of Tasmania; Financial Research Network (FIRN)

Deniz Erdemlioglu

IESEG School of Management and CNRS - France

Marius Matei

University of Tasmania

Xiye Yang

Rutgers University

Date Written: September 18, 2017

Abstract

We propose a new nonparametric test to identify mutually exciting jumps in high frequency data. We derive the asymptotic properties of the test statistics and show that the tests have good size and reasonable power in finite sample cases. Using our mutual excitation tests, we empirically characterize the dynamics of financial flights in forms of flight-to-safety and flight-to-quality. The results indicate that mutually exciting jumps and risk-off trades mostly occur in periods of high market stress. Flight-to-safety episodes (from stocks to gold) arrive more frequently than do flight-to-quality spells (from stocks to bonds). We further find evidence that reverse cross-excitations or seeking-return-strategies exhibit significant asymmetry over the business cycle, reflecting the fact that investors appear to be selling gold—rather than bonds—to invest in stocks during good market conditions.

Keywords: Flight-to-safety, Flight-to-quality, Mutual excitation in jumps, High frequency data, Stock-bond comovement

JEL Classification: G01, G12, G15, C12, C14, C58

Suggested Citation

Dungey, Mardi H. and Erdemlioglu, Deniz and Matei, Marius and Yang, Xiye, Testing for Mutually Exciting Jumps and Financial Flights in High Frequency Data (September 18, 2017). Journal of Econometrics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2787304 or http://dx.doi.org/10.2139/ssrn.2787304

Mardi H. Dungey

University of Tasmania ( email )

French Street
Sandy Bay
Tasmania, 7250
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Deniz Erdemlioglu (Contact Author)

IESEG School of Management and CNRS - France ( email )

3 rue de la Digue
Lille, 59000
France

Marius Matei

University of Tasmania ( email )

French Street
Sandy Bay
Tasmania, 7250
Australia

Xiye Yang

Rutgers University ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://economics.rutgers.edu/people/474-xiye-yang

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