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The Fine Structure of Asset Returns: An Empirical Investigation

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  • Peter Carr

    (New York University)

  • Helyette Geman

    (Universite Paris Dauphine and Ecole Superieure des Sciences Economiques et Commerciales)

Abstract

We investigate the importance of diffusion and jumps in a new model for asset returns. In contrast to standard models, we allow for jump components displaying finite or infinite activity and variation. Empirical investigations of time series indicate that index dynamics are devoid of a diffusion component, which may be present in the dynamics of individual stocks. This leads to the conjecture, confirmed on options data, that the risk-neutral process should be free of a diffusion component. We conclude that the statistical and risk-neutral processes for equity prices are pure jump processes of infinite activity and finite variation.

Suggested Citation

  • Peter Carr & Helyette Geman, 2002. "The Fine Structure of Asset Returns: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 75(2), pages 305-332, April.
  • Handle: RePEc:ucp:jnlbus:v:75:y:2002:i:2:p:305-332
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