Fact or friction: Jumps at ultra high frequency

Kim Christensen (), Roel Oomen () and Mark Podolskij ()
Additional contact information
Roel Oomen: Deutsche Bank, London, Postal: Hillcrest, Uplands Way, Sevenoaks TN13 3BN, UK

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

Abstract: In this paper, we demonstrate that jumps in financial asset prices are not nearly as common as generally thought, and that they account for only a very small proportion of total return variation. We base our investigation on an extensive set of ultra high-frequency equity and foreign exchange rate data recorded at milli-second precision, allowing us to view the price evolution at a microscopic level. We show that both in theory and practice, traditional measures of jump variation based on low-frequency tick data tend to spuriously attribute a burst of volatility to the jump component thereby severely overstating the true variation coming from jumps. Indeed, our estimates based on tick data suggest that the jump variation is an order of magnitude smaller. This finding has a number of important implications for asset pricing and risk management and we illustrate this with a delta hedging example of an option trader that is short gamma. Our econometric analysis is build around a pre-averaging theory that allows us to work at the highest available frequency, where the data are polluted bymicrostructure noise. We extend the theory in a number of directions important for jump estimation and testing. This also reveals that pre-averaging has a built-in robustness property to outliers in high-frequency data, and allows us to show that some of the few remaining jumps at tick frequency are in fact induced by data-cleaning routines aimed at removing the outliers.

Keywords: jump variation; high-frequency data; market microstructure noise; pre-averaging; realised variation; outliers. (search for similar items in EconPapers)
JEL-codes: C10 C80 (search for similar items in EconPapers)
Pages: 49
Date: 2011-05-26
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/11/rp11_19.pdf (application/pdf)

Related works:
Journal Article: Fact or friction: Jumps at ultra high frequency (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2011-19

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().