The Relative Contribution of Jumps to Total Price Variance

Xin Huang and George Tauchen ()

Journal of Financial Econometrics, 2005, vol. 3, issue 4, 456-499

Abstract: We examine tests for jumps based on recent asymptotic results; we interpret the tests as Hausman-type tests. Monte Carlo evidence suggests that the daily ratio z-statistic has appropriate size, good power, and good jump detection capabilities revealed by the confusion matrix comprised of jump classification probabilities. We identify a pitfall in applying the asymptotic approximation over an entire sample. Theoretical and Monte Carlo analysis indicates that microstructure noise biases the tests against detecting jumps, and that a simple lagging strategy corrects the bias. Empirical work documents evidence for jumps that account for 7% of stock market price variance. Copyright 2005, Oxford University Press.

Date: 2005
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