Risk, Jumps, and Diversification

Tim Bollerslev (), Tzuo Hann Law and George Tauchen ()
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George Tauchen: School of Economics and Management, University of Aarhus, Denmark and CREATES, Postal: 8000 Aarhus C, Denmark

CREATES Research Papers from School of Economics and Management, University of Aarhus

Abstract: We test for price discontinuities, or jumps, in a panel of high-frequency intraday returns for forty large-cap stocks and an equiweighted index from these same stocks. Jumps are naturally classified into two types: common and idiosyncratic. Common jumps affect all stocks, albeit to varying degrees, while idiosyncratic jumps are stock-specific. Despite the fact that each of the stocks has a of about unity with respect to the index, common jumps are virtually never detected in the individual stocks. This is truly puzzling, as an index can jump only if one or more of its components jump. To resolve this puzzle, we propose a new test for cojumps. Using this new test we find strong evidence for many modest-sized common jumps that simply pass through the standard jump detection statistic, while they appear highly significant in the cross section based on the new cojump identification scheme. Our results are further corroborated by a striking within-day pattern in the non-diversifiable cojumps.

Keywords: risk; diversification (search for similar items in EconPapers)
JEL-codes: C12 C32 C33 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2007-08-16
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Journal Article: Risk, jumps, and diversification (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:aah:create:2007-19

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