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Price and volatility co-jumps

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  • Bandi, F.M.
  • Renò, R.

Abstract

The nature of the dependence between discontinuities in prices and contemporaneous discontinuities in volatility (co-jumps) has been reported by many as being elusive, in terms of sign, magnitude, and statistical significance. Using a novel identification strategy in continuous time relying on trade-level information for spot variance estimation, as well as infinitesimal cross-moments, we document that a sizeable proportion of discontinuous changes in prices are associated with strongly anti-correlated, contemporaneous, discontinuous changes in volatility. Assuming a possibly nonmonotonic pricing kernel, we illustrate the equilibrium implications of price and volatility co-jumps for return and variance risk premia.

Suggested Citation

  • Bandi, F.M. & Renò, R., 2016. "Price and volatility co-jumps," Journal of Financial Economics, Elsevier, vol. 119(1), pages 107-146.
  • Handle: RePEc:eee:jfinec:v:119:y:2016:i:1:p:107-146
    DOI: 10.1016/j.jfineco.2015.05.007
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Caporin, Massimiliano & Kolokolov, Aleksey & Renò, Roberto, 2017. "Systemic co-jumps," Journal of Financial Economics, Elsevier, vol. 126(3), pages 563-591.
      • Caporin, Massimiliano & Kolokolov, Alexey & Renò, Roberto, 2016. "Systemic co-jumps," SAFE Working Paper Series 149, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. repec:eee:jbfina:v:83:y:2017:i:c:p:85-103 is not listed on IDEAS
    3. repec:eee:econom:v:202:y:2018:i:1:p:18-44 is not listed on IDEAS
    4. Caporin, Massimiliano & Rossi, Eduardo & Santucci de Magistris, Paolo, 2017. "Chasing volatility," Journal of Econometrics, Elsevier, vol. 198(1), pages 122-145.
    5. Worapree Maneesoonthorn & Gael M. Martin & Catherine S. Forbes, 2017. "Dynamic Asset Price Jumps and the Performance of High Frequency Tests and Measures," Papers 1708.09520, arXiv.org.
    6. Bee, Marco & Dupuis, Debbie J. & Trapin, Luca, 2016. "Realizing the extremes: Estimation of tail-risk measures from a high-frequency perspective," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 86-99.
    7. repec:eee:dyncon:v:85:y:2017:i:c:p:59-89 is not listed on IDEAS
    8. repec:eee:jfinec:v:125:y:2017:i:1:p:72-98 is not listed on IDEAS
    9. repec:eee:econom:v:203:y:2018:i:2:p:223-240 is not listed on IDEAS
    10. repec:eee:econom:v:201:y:2017:i:2:p:417-432 is not listed on IDEAS
    11. Andras Fulop & Junye Li & Jun Yu, 2012. "Bayesian Learning of Impacts of Self-Exciting Jumps in Returns and Volatility," Working Papers 03-2012, Singapore Management University, School of Economics.
    12. Andras Fulop & Junye Li & Jun Yu, 2012. "Investigating Impacts of Self-Exciting Jumps in Returns and Volatility: A Bayesian Learning Approach," Global COE Hi-Stat Discussion Paper Series gd12-264, Institute of Economic Research, Hitotsubashi University.
    13. Worapree Maneesoonthorn & Gael M. Martin & Catherine S. Forbes, 2017. "Dynamic asset price jumps and the performance of high frequency tests and measures," Monash Econometrics and Business Statistics Working Papers 14/17, Monash University, Department of Econometrics and Business Statistics.
    14. David T. Frazier & Worapree Maneesoonthorn & Gael M. Martin & Brendan P.M. McCabe, 2018. "Approximate Bayesian forecasting," Monash Econometrics and Business Statistics Working Papers 2/18, Monash University, Department of Econometrics and Business Statistics.
    15. Bibinger, Markus & Neely, Christopher J. & Winkelmann, Lars, 2017. "Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book," Working Papers 2017-12, Federal Reserve Bank of St. Louis.
    16. repec:oup:jfinec:v:16:y:2018:i:1:p:118-128. is not listed on IDEAS

    More about this item

    Keywords

    Stochastic volatility; Jumps in prices; Jumps in volatility; Co-jumps; Infinitesimal cross-moments; Return risk premia; Variance risk premia;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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