Jump Tails, Extreme Dependencies, and the Distribution of Stock Returns

Tim Bollerslev and Viktor Todorov ()
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Viktor Todorov: Department of Finance, Kellogg School of Management, Northwestern University, Postal: Evanston, IL 60208, USA

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We provide a new framework for estimating the systematic and idiosyncratic jump tail risks in financial asset prices. The theory underlying our estimates are based on in-fill asymptotic arguments for directly identifying the systematic and idiosyncratic jumps, together with conventional long-span asymptotics and Extreme Value Theory (EVT) approximations for consistently estimating the tail decay parameters and asymptotic tail dependencies. On implementing the new estimation procedures with a panel of highfrequency intraday prices for a large cross-section of individual stocks and the aggregate S&P 500 market portfolio, we find that the distributions of the systematic and idiosyncratic jumps are both generally heavy-tailed and not necessarily symmetric. Our estimates also point to the existence of strong dependencies between the market-wide jumps and the corresponding systematic jump tails for all of the stocks in the sample. We also show how the jump tail dependencies deduced from the high-frequency data together with the day-to-day temporal variation in the volatility are able to explain the “extreme” dependencies vis-a-vis the market portfolio.

Keywords: Extreme events; jumps; high-frequency data; jump tails; non-parametric estimation; stochastic volatility; systematic risks; tail dependence. (search for similar items in EconPapers)
JEL-codes: C13 C14 G10 G12 (search for similar items in EconPapers)
Pages: 34
Date: 2010-09-10
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk, nep-mst and nep-rmg
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Journal Article: Jump tails, extreme dependencies, and the distribution of stock returns (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2010-64

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