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Estimation and Testing in Models Containing Both Jump and Conditional Heteroscedasticity

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  • Drost, Feike C
  • Nijman, Theo E
  • Werker, Bas J M

Abstract

In this paper, the authors develop a test for the hypothesis that a series (observed in discrete time) is generated by a diffusion process. This test is based on an overidentifying relation between variance and kurtosis parameters that holds for GARCH diffusions. The proposed test is not specific to a particular data frequency and clearly indicates the presence of jumps in dollar exchange rates. To assess the size and intensity of the jumps, the authors estimate a model containing both jumps and conditional heteroskedasticity.

Suggested Citation

  • Drost, Feike C & Nijman, Theo E & Werker, Bas J M, 1998. "Estimation and Testing in Models Containing Both Jump and Conditional Heteroscedasticity," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 237-243, April.
    • Handle: RePEc:bes:jnlbes:v:16:y:1998:i:2:p:237-43
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    References listed on IDEAS

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    1. Fred G M C Nieuwland & Willem F C Verschoor & Christian C P Wolff, 1990. "EMS Exchange Rates," CEPR Financial Markets Paper 0002, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX..
    2. Drost, Feike C & Nijman, Theo E, 1993. "Temporal Aggregation of GARCH Processes," Econometrica, Econometric Society, vol. 61(4), pages 909-927, July.
    3. Vlaar, Peter J G & Palm, Franz C, 1993. "The Message in Weekly Exchange Rates in the European Monetary System: Mean Reversion, Conditional Heteroscedasticity, and Jumps," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 351-360, July.
    4. Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
    5. Nijman, Theo & Sentana, Enrique, 1996. "Marginalization and contemporaneous aggregation in multivariate GARCH processes," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 71-87.
    6. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    7. Amin, Kaushik I, 1993. "Jump Diffusion Option Valuation in Discrete Time," Journal of Finance, American Finance Association, vol. 48(5), pages 1833-1863, December.
    8. Beckers, Stan, 1981. "A Note on Estimating the Parameters of the Diffusion-Jump Model of Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(1), pages 127-140, March.
    9. Amin, Kaushik I & Ng, Victor K, 1993. "Option Valuation with Systematic Stochastic Volatility," Journal of Finance, American Finance Association, vol. 48(3), pages 881-910, July.
    10. Naik, Vasanttilak, 1993. "Option Valuation and Hedging Strategies with Jumps in the Volatility of Asset Returns," Journal of Finance, American Finance Association, vol. 48(5), pages 1969-1984, December.
    11. Drost, Feike C. & Werker, Bas J. M., 1996. "Closing the GARCH gap: Continuous time GARCH modeling," Journal of Econometrics, Elsevier, vol. 74(1), pages 31-57, September.
    12. Nijman, Theo & Sentana, Enrique, 1996. "Marginalization and contemporaneous aggregation in multivariate GARCH processes," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 71-87.
    13. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 60-68, January.
    14. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    15. Drost, F.C. & Werker, B.J.M., 1994. "Closing the GARCH gap : Continuous time GARCH modeling," Other publications TiSEM 15acbe8a-915c-4cc6-bd4c-d, Tilburg University, School of Economics and Management.
    16. Philippe Jorion, 1988. "On Jump Processes in the Foreign Exchange and Stock Markets," The Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 427-445.
    17. Ball, Clifford A & Torous, Walter N, 1985. "On Jumps in Common Stock Prices and Their Impact on Call Option Pricing," Journal of Finance, American Finance Association, vol. 40(1), pages 155-173, March.
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