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Brownian motion vs. pure-jump processes for individual stocks

  • Benoît Sévi

    ()

    (Aix-Marseille School of Economics (DEFI))

  • César Baena

    ()

    (BEM Bordeaux Management School)

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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File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I4-P284.pdf
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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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  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2005. "Roughing it Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility," NBER Working Papers 11775, National Bureau of Economic Research, Inc.
  2. Torben G. Andersen & Tim Bollerslev & Per Houmann Frederiksen & Morten Ørregaard Nielsen, 2007. "Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns," CREATES Research Papers 2007-21, School of Economics and Management, University of Aarhus.
  3. Federico M. Bandi & Benoit Perron, 2006. "Long Memory and the Relation Between Implied and Realized Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 636-670.
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  9. 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.
  10. Torben G. Andersen & Tim Bollerslev & Dobrislav Dobrev, 2007. "No-Arbitrage Semi-Martingale Restrictions for Continuous-Time Volatility Models subject to Leverage Effects, Jumps and i.i.d. Noise: Theory and Testable Distributional Implications," NBER Working Papers 12963, National Bureau of Economic Research, Inc.
  11. George Tauchen & Viktor Todorov, 2010. "Activity Signature Functions for High-Frequency Data Analysis," Working Papers 10-08, Duke University, Department of Economics.
  12. Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
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  14. Jun Liu & Francis A. Longstaff & Jun Pan, 2002. "Dynamic Asset Allocation With Event Risk," NBER Working Papers 9103, National Bureau of Economic Research, Inc.
  15. Viktor Todorov & George Tauchen, 2010. "Volatility Jumps," Working Papers 10-09, Duke University, Department of Economics.
  16. Bjørn Eraker, 2004. "Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1367-1404, 06.
  17. 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.
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