The Relative Contribution of Jumps to Total Price Variance

Posted: 29 Feb 2008

See all articles by Xin Huang

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: 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 7% of stock market price variance.

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

Suggested Citation

Huang, Xin and Tauchen, George E., The Relative Contribution of Jumps to Total Price Variance ( 2005). Journal of Financial Econometrics, Vol. , pp. -, , Available at SSRN: https://ssrn.com/abstract=821758

Xin Huang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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George E. Tauchen

Duke University - Economics Group ( email )

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