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Testing for jumps when asset prices are observed with noise-a "swap variance" approach

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Author Info
Jiang, George J.
Oomen, Roel C.A.

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Abstract

This paper proposes a new test for jumps in asset prices that is motivated by the literature on variance swaps. Formally, the test follows by a direct application of Itô's lemma to the semi-martingale process of asset prices and derives its power from the impact of jumps on the third and higher order return moments. Intuitively, the test statistic reflects the cumulative gain of a variance swap replication strategy which is known to be minimal in the absence of jumps but substantial in the presence of jumps. Simulations show that the jump test has nice properties and is generally more powerful than the widely used bi-power variation test. An important feature of our test is that it can be applied-in analytically modified form-to noisy high frequency data and still retain power. As a by-product of our analysis, we obtain novel analytical results regarding the impact of noise on bi-power variation. An empirical illustration using IBM trade data is also included.

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File URL: http://www.sciencedirect.com/science/article/B6VC0-4SHMCNM-1/1/3432963085b3b695f90efa207e53e2bd
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Publisher Info
Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 144 (2008)
Issue (Month): 2 (June)
Pages: 352-370
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Handle: RePEc:eee:econom:v:144:y:2008:i:2:p:352-370

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Web page: http://www.elsevier.com/locate/jeconom

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  1. Kim Christensen & Roel Oomen & Mark Podolskij, 2009. "Realised Quantile-Based Estimation of the Integrated Variance," CREATES Research Papers 2009-27, School of Economics and Management, University of Aarhus. [Downloadable!]
  2. Torben B. Rasmussen, 2009. "Jump Testing and the Speed of Market Adjustment," CREATES Research Papers 2009-08, School of Economics and Management, University of Aarhus. [Downloadable!]
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This page was last updated on 2009-11-13.

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