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Brownian motion vs. pure-jump processes for individual stocks

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  • Benoît Sévi

    ()
    (Aix-Marseille School of Economics (DEFI))

  • César Baena

    ()
    (BEM Bordeaux Management School)

Abstract

Using recent activity signature function methodology developed in Todorov and Tauchen (2010), we provide empirical evidence that individual stocks from the New York Stock Exchange are adequately represented by a Brownian motion plus medium to large (rare) jumps thus invalidating the pure-jump process hypothesis proposed in numerous contributions. This result improves our understanding of the fine structure of asset prices and has implications for derivatives pricing.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 4 ()
Pages: 3138-3152

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Handle: RePEc:ebl:ecbull:eb-11-00669

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Keywords: asset prices; Brownian motion; jumps; activity signature functions;

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References

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  1. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management.
  2. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2007. "Roughing It Up: Including Jump Components in the Measurement, Modeling, and Forecasting of Return Volatility," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 701-720, November.
  3. Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Torben G. Andersen & Tim Bollerslev & Per Frederiksen & Morten Ørregaard Nielsen, 2008. "Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns," Working Papers 1173, Queen's University, Department of Economics.
  5. George Tauchen & Viktor Todorov, 2010. "Activity Signature Functions for High-Frequency Data Analysis," Working Papers 10-08, Duke University, Department of Economics.
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  17. Yacine Aït-Sahalia & Jean Jacod, 2010. "Analyzing the Spectrum of Asset Returns: Jump and Volatility Components in High Frequency Data," NBER Working Papers 15808, National Bureau of Economic Research, Inc.
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