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Risk, jumps, and diversification

  • Bollerslev, Tim
  • Law, Tzuo Hann
  • Tauchen, George

We test for price discontinuities, or jumps, in a panel of high-frequency intraday stock returns and an equiweighted index constructed from the same stocks. Using a new test for common jumps that explicitly utilizes the cross-covariance structure in the returns to identify non-diversifiable jumps, we find strong evidence for many modest-sized, yet highly significant, cojumps that simply pass through standard jump detection statistics when applied on a stock-by-stock basis. Our results are further corroborated by a striking within-day pattern in the significant cojumps, with a sharp peak at the time of regularly scheduled macroeconomic news announcements.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 144 (2008)
Issue (Month): 1 (May)
Pages: 234-256

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Handle: RePEc:eee:econom:v:144:y:2008:i:1:p:234-256
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  1. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2004. "Real-time price discovery in stock, bond and foreign exchange markets," CFS Working Paper Series 2004/19, Center for Financial Studies (CFS).
  2. Harris, Lawrence, 1986. "A transaction data study of weekly and intradaily patterns in stock returns," Journal of Financial Economics, Elsevier, vol. 16(1), pages 99-117, May.
  3. Ole E. Barndorff-Nielsen & Neil Shephard, 2003. "Power and bipower variation with stochastic volatility and jumps," Economics Papers 2003-W17, Economics Group, Nuffield College, University of Oxford.
  4. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2007. "Roughing It Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility," CREATES Research Papers 2007-18, Department of Economics and Business Economics, Aarhus University.
  5. Amihud, Yakov & Mendelson, Haim, 1987. " Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-53, July.
  6. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2002. "Parametric and Nonparametric Volatility Measurement," NBER Technical Working Papers 0279, National Bureau of Economic Research, Inc.
  7. Ole E. Barndorff-Nielsen & Neil Shephard, 2004. "Econometrics of testing for jumps in financial economics using bipower variationÂ," OFRC Working Papers Series 2004fe01, Oxford Financial Research Centre.
  8. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange?," Center for Financial Institutions Working Papers 02-23, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Ole Barndorff-Nielsen & Svend Erik Graversen & Jean Jacod & Mark Podolskij & Neil Shephard, 2004. "A Central Limit Theorem for Realised Power and Bipower Variations of Continuous Semimartingales," Economics Papers 2004-W29, Economics Group, Nuffield College, University of Oxford.
  10. Suzanne S. Lee & Per A. Mykland, 2008. "Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2535-2563, November.
  11. Yacine Ait-Sahalia & Per A. Mykland, 2003. "How Often to Sample a Continuous-Time Process in the Presence of Market Microstructure Noise," NBER Working Papers 9611, National Bureau of Economic Research, Inc.
  12. Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, vol. 53(1), pages 219-265, 02.
  13. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2007. "Real-time price discovery in global stock, bond and foreign exchange markets," Journal of International Economics, Elsevier, vol. 73(2), pages 251-277, November.
  14. Hansen, Peter R. & Lunde, Asger, 2006. "Realized Variance and Market Microstructure Noise," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 127-161, April.
  15. Wood, Robert A & McInish, Thomas H & Ord, J Keith, 1985. " An Investigation of Transactions Data for NYSE Stocks," Journal of Finance, American Finance Association, vol. 40(3), pages 723-39, July.
  16. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 389-415.
  17. Bjørn Eraker & Michael Johannes & Nicholas Polson, 2003. "The Impact of Jumps in Volatility and Returns," Journal of Finance, American Finance Association, vol. 58(3), pages 1269-1300, 06.
  18. Harris, Lawrence, 1990. "Estimation of Stock Price Variances and Serial Covariances from Discrete Observations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 291-306, September.
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