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The Relative Contribution of Jumps to Total Price Variance

60 Pages Posted: 24 Aug 2005  

Xin Huang

Board of Governors of the Federal Reserve System

George Tauchen

Duke University - Economics Group

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

We examine tests for jumps based on recent asymptotic results; we interpret the tests as Hausman-type tests. Monte Carlo evidence suggests that the daily ratio z-statistic has appropriate size, good power, and good jump detection capabilities revealed by the confusion matrix comprised of jump classification probabilities. We identify a pitfall in applying the asymptotic approximation over an entire sample. Theoretical and Monte Carlo analysis indicates that microstructure noise biases the tests against detecting jumps, and that a simple lagging strategy corrects the bias. Empirical work documents evidence for jumps that account for seven percent of stock market price variance.

Keywords: Realized variance, quadratic variation, bipower variation, stochastic volatility

JEL Classification: G12, C51, C52

Suggested Citation

Huang, Xin and Tauchen, George, The Relative Contribution of Jumps to Total Price Variance (July 2005). Available at SSRN: https://ssrn.com/abstract=609321 or http://dx.doi.org/10.2139/ssrn.609321

Xin Huang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

George E. Tauchen (Contact Author)

Duke University - Economics Group ( email )

Box 90097
221 Social Sciences
Durham, NC 27708-0097
United States
919-660-1812 (Phone)
919-684-8974 (Fax)

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