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Jump tails, extreme dependencies, and the distribution of stock returns

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  • Bollerslev, Tim
  • Todorov, Viktor
  • Li, Sophia Zhengzi

Abstract

We provide a new framework for estimating the systematic and idiosyncratic jump tail risks in financial asset prices. Our estimates are based on in-fill asymptotics for directly identifying the jumps, together with Extreme Value Theory (EVT) approximations and methods-of-moments for assessing the tail decay parameters and tail dependencies. On implementing the procedures with a panel of intraday prices for a large cross-section of individual stocks and the S&P 500 market portfolio, we find that the distributions of the systematic and idiosyncratic jumps are both generally heavy-tailed and close to symmetric, and show how the jump tail dependencies deduced from the high-frequency data together with the day-to-day variation in the diffusive volatility account for the “extreme” joint dependencies observed at the daily level.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 172 (2013)
Issue (Month): 2 ()
Pages: 307-324

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Handle: RePEc:eee:econom:v:172:y:2013:i:2:p:307-324

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

Related research

Keywords: Extreme events; Jumps; High-frequency data; Jump tails; Non-parametric estimation; Stochastic volatility; Systematic risks; Tail dependence;

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References

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Cited by:
  1. Gilder, Dudley & Shackleton, Mark B. & Taylor, Stephen J., 2014. "Cojumps in stock prices: Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 443-459.
  2. Tolikas, Konstantinos, 2014. "Unexpected tails in risk measurement: Some international evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 476-493.
  3. Schwarz, Claudia, 2014. "Investor fears and risk premia for rare events," Discussion Papers 03/2014, Deutsche Bundesbank, Research Centre.

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