Detecting jumps from Levy jump diffusion processes

doi:10.1016/j.jfineco.2009.12.009

Detecting jumps from Levy jump diffusion processes

2010-05-01

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DOI：10.1016/j.jfineco.2009.12.009

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Recent asset-pricing models incorporate jump risk through Levy processes in addition to diffusive risk. This paper studies how to detect stochastic arrivals of small and big Levy jumps with new nonparametric tests. The tests allow for robust analysis of their separate characteristics and facilitate better estimation of return dynamics. Empirical evidence of both small and big jumps based on these tests suggests that models for individual equities and overall market indices require incorporating Levy-type jumps. The evidence of small jumps also helps explain why jumps in the market index are uncorrelated with jumps in its component equities. (C) 2009 Elsevier B.V. All rights reserved.

Keywords:

Levy jumps

Nonparametric tests

Belief measure

False detection

High-frequency data

Detecting jumps from Levy jump diffusion processes

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