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Jump Testing and the Speed of Market Adjustment

  • Torben B. Rasmussen

    ()

    (Aarhus University and CREATES)

Registered author(s):

    Asymptotic properties of jump tests rely on the property that any jump occurs within a single time interval no matter what the observation frequency is. Market microstructure effects in relation to news-induced revaluation of the underlying variable is likely to make this an unrealistic assumption for high-frequency transaction data. To capture these microstructure effects, this paper suggests a model in which market prices adjust gradually to jumps in the underlying effcient price. A case study illustrates the empirical relevance of the model, and the performance of different jump tests is investigated here and in a simulation study. Evidence indicates that tests based on the largest of scaled price increments perform better than tests comparing measures of variability. Resolving the matter by testing at lower frequencies turns out to be less straightforward.

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    File URL: ftp://ftp.econ.au.dk/creates/rp/09/rp09_08.pdf
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    Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-08.

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    Length: 49
    Date of creation: 27 Feb 2009
    Date of revision:
    Handle: RePEc:aah:create:2009-08
    Contact details of provider: Web page: http://www.econ.au.dk/afn/

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    8. Jacod, Jean & Li, Yingying & Mykland, Per A. & Podolskij, Mark & Vetter, Mathias, 2009. "Microstructure noise in the continuous case: The pre-averaging approach," Stochastic Processes and their Applications, Elsevier, vol. 119(7), pages 2249-2276, July.
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    15. Damodaran, Aswath, 1993. " A Simple Measure of Price Adjustment Coefficients," Journal of Finance, American Finance Association, vol. 48(1), pages 387-400, March.
    16. Jean Jacod & Yingying Li & Per A. Mykland & Mark Podolskij & Mathias Vetter, 2007. "Microstructure Noise in the Continuous Case: The Pre-Averaging Approach - JLMPV-9," CREATES Research Papers 2007-43, School of Economics and Management, University of Aarhus.
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