Price and volatility co-jumps

F.M. Bandi and Roberto Renò

Journal of Financial Economics, 2016, vol. 119, issue 1, 107-146

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.

Keywords: Stochastic volatility; Jumps in prices; Jumps in volatility; Co-jumps; Infinitesimal cross-moments; Return risk premia; Variance risk premia (search for similar items in EconPapers)
JEL-codes: C14 C58 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (71)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:119:y:2016:i:1:p:107-146

DOI: 10.1016/j.jfineco.2015.05.007

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