A Simple Robust Test for the Presence of Jumps in Asset Prices

44 Pages Posted: 13 Sep 2001  

Peter Carr

New York University (NYU) - Courant Institute of Mathematical Sciences

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

Date Written: July, 2001

Abstract

We develop a simple robust test for the presence of jumps in the price of an asset underlying an option. Our test examines the prices of at and out-of-the-money options as the time to maturity of the option approaches zero. We show that these prices converge to zero at speeds which depend on whether the price process is pure diffusion, pure jump, or a mixture of both. By applying our test to S&P 500 options data, we conclude that this index contains a jump component. Furthermore, there are strong indications of both a diffusion component and stochastic volatility.

JEL Classification: G12, G13, C52.

Suggested Citation

Carr, Peter and Wu, Liuren, A Simple Robust Test for the Presence of Jumps in Asset Prices (July, 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=283315 or http://dx.doi.org/10.2139/ssrn.283315

Peter P. Carr

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States

Liuren Wu (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://faculty.baruch.cuny.edu/lwu/

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