Heterogeneous investment horizons, risk regimes, and realized jumps

Deniz Erdemlioglu and Nikola Gradojevic
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Deniz Erdemlioglu: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper introduces a new empirical framework to identify the regimes of jump‐type tail risk over multiple trading horizons. Our approach combines the hidden Markov regime‐switching model with realized jumps, which allows us to examine the tail risk exposure of investors at different investment scales. Applying our method to data on bonds, stocks, and currencies, we find evidence that market risk linked to jumps exhibits time‐varying regime shifts and horizon‐dependence. We show that high‐frequency trading does not contribute to market instability, as measured by jump risk. The European bond market appears to be more vulnerable to downside (left‐tail) jump risk, relative to the U.S. Treasury bond market. Market jump fear embedded in the VIX exhibits vertical clustering where both risk regimes at low frequencies remain unchanged at higher frequencies. These results suggest that the premium for jump risk not only depends on stress periods, but also on the frequency at which investors trade financial assets.

Date: 2020-01-06
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Published in International Journal of Finance and Economics, 2020, ⟨10.1002/ijfe.1807⟩

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Journal Article: Heterogeneous investment horizons, risk regimes, and realized jumps (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02995997

DOI: 10.1002/ijfe.1807

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