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A Comprehensive Comparison of Alternative Tests for Jumps in Asset Prices

Listed author(s):
  • Marina Theodosiou

    ()

    (Central Bank of Cyprus)

  • Filip Zikes

    ()

    (Imperial College London)

Registered author(s):

    This paper presents a comprehensive comparison of the existing tests for the presence of jumps in prices of financial assets. The relative performance of the tests is examined in a Monte Carlo simulation, covering scenarios of both finite and infinite activity jumps, stochastic volatility models with continuous and discontinuous volatility sample paths, microstructure noise, infrequent trading and deterministic diurnal volatility. The simulation results reveal important differences in terms of size and power across the different data generating processes and sensitivity to the presence of zero returns and microstructure frictions in the data. An empirical application to assets from different classes complements the analysis.

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    File URL: http://www.centralbank.gov.cy/media/pdf/NPWPE_no2_072011.pdf
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    Paper provided by Central Bank of Cyprus in its series Working Papers with number 2011-2.

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    Length: 46 pages
    Date of creation: Jul 2011
    Handle: RePEc:cyb:wpaper:2011-1
    Contact details of provider: Web page: http://www.centralbank.gov.cy/nqcontent.cfm?a_id=1

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    7. Pan, Jun, 2002. "The jump-risk premia implicit in options: evidence from an integrated time-series study," Journal of Financial Economics, Elsevier, vol. 63(1), pages 3-50, January.
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    9. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    10. Andersen, Torben G. & Bollerslev, Tim & Dobrev, Dobrislav, 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," Journal of Econometrics, Elsevier, vol. 138(1), pages 125-180, May.
    11. Jiang, George J. & Oomen, Roel C.A., 2008. "Testing for jumps when asset prices are observed with noise-a "swap variance" approach," Journal of Econometrics, Elsevier, vol. 144(2), pages 352-370, June.
    12. Yacine Aït-Sahalia, 2002. "Telling from Discrete Data Whether the Underlying Continuous-Time Model Is a Diffusion," Journal of Finance, American Finance Association, vol. 57(5), pages 2075-2112, October.
    13. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
    14. Joel Hasbrouck, 1999. "The Dynamics of Discrete Bid and Ask Quotes," Journal of Finance, American Finance Association, vol. 54(6), pages 2109-2142, December.
    15. Chernov, Mikhail & Ronald Gallant, A. & Ghysels, Eric & Tauchen, George, 2003. "Alternative models for stock price dynamics," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 225-257.
    16. 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.
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    18. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    19. Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
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