Heterogeneous Investment Horizons, Risk Regimes and Realized Jumps

51 Pages Posted: 16 Aug 2017 Last revised: 17 Oct 2019

See all articles by Deniz Erdemlioglu

Deniz Erdemlioglu

IESEG School of Management, LEM-CNRS 9221, France

Nikola Gradojevic

University of Guelph, Department of Economics and Finance; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Date Written: February 27, 2017

Abstract

This paper introduces a new empirical framework to identify the regimes of jump-type tail risk over multiple trading horizons. Our approach combines the hidden Markov regime-switching model with realized jumps, which allows us to examine the tail risk exposure of investors at different investment scales. Applying our method to data on bonds, stocks and currencies, we find evidence that market risk linked to jumps exhibits time-varying regime shifts and horizon-dependence. We show that high-frequency trading does not contribute to market instability, as measured by jump risk. The European bond market appears to be more vulnerable to downside (left-tail) jump risk, relative to the U.S. Treasury bond market. Market jump fear embedded in the VIX exhibits vertical clustering where both risk regimes at low frequencies remain unchanged at higher frequencies. These results suggest that the premium for jump risk not only depends on stress periods, but also on the frequency at which investors trade financial assets.

Keywords: Jumps, Volatility, High-frequency data, VIX, Multiple investment scales, Hidden Markov regime-switching models

JEL Classification: C58, G10, G12, G15

Suggested Citation

Erdemlioglu, Deniz and Gradojevic, Nikola, Heterogeneous Investment Horizons, Risk Regimes and Realized Jumps (February 27, 2017). Available at SSRN: https://ssrn.com/abstract=3018814

Deniz Erdemlioglu (Contact Author)

IESEG School of Management, LEM-CNRS 9221, France ( email )

3 rue de la Digue
Lille, 59000
France

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

Nikola Gradojevic

University of Guelph, Department of Economics and Finance ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

HOME PAGE: http://https://www.uoguelph.ca/economics/users/nikola-gradojevic

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

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