Assessing jump and cojumps in financial asset returns with applications in futures markets

Jin-Huei Yeh and Mu-Shu Yun

Pacific-Basin Finance Journal, 2023, vol. 82, issue C

Abstract: Price jumps and extreme dependence in financial asset prices are both very important issues in Finance since both would distort the decisions in asset allocation and risk management. Cojumps, as joint occurrence of extreme price movements, share even relevant financial implications about systematic risk. This paper aims to unravel the empirical relationship between cojumps and tail dependence. We first propose a simple approach for identifying jumps and co-jumps in asset prices utilizing the recent realized measures of variation in high frequency finance. The framework is informative in testing the existence of jumps, dating jump days, and quantifying jump contributions to price variations. Our identification approach improves the over-alarm detection of jumps from previous formal tests. Applying the idea to test the presence of cojumps in realized covariances allows us to disentangle the nature of cojumps and the real source of extreme tail dependence. For the empirically investigated S&P 500 spot and futures indices, we find asymmetries in both the frequencies and magnitudes among those downward or upward abrupt comovements. Perhaps surprisingly, we find that it is covolatility instead of cojumps in asset prices that counter-intuitively contributes to the observed extreme tail dependence. However, when the tests are applied in the Taiwanese TAIEX futures and spot indices, a completely different picture emerged. We found evidence of prevailing cojumps, and moreover, it is these cojumps that triggered the marginal jumps within each index returns and contributed to the extreme returns. When further examined cross-sectionally with Taiwanese and Chinese future indices, we documented a pattern of cojump induced tail dependence in futures returns across the Taiwan straits.

Keywords: Jumps; Cojump; Realized power variation; Extreme tail; Tail dependence (search for similar items in EconPapers)
JEL-codes: C14 C22 C32 G10 G23 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:82:y:2023:i:c:s0927538x23002287

DOI: 10.1016/j.pacfin.2023.102157

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