Seminar

Price and volatility co-jumps

Frederico Bandi (University of John Hopkins)

March 27, 2012, 14:00–15:30

Toulouse

Room Amphi S

Econometrics Seminar

Abstract

A sizeable proportion of large, discontinuous, changes in asset prices are found to be associated with contemporaneous large, discontinuous, changes in volatility, i.e., co-jumps. When occurring jointly, the price jumps tend to be negative while the volatility jumps tend to be positive. Unusually large, negative, price discontinuities are often accompanied by unusually large, positive, volatility changes, as implied by a strong anti-correlation between the jump sizes. Further, the distribution of the price co-jump sizes is found to depend on the underlying volatility level and become more dispersed, as well as more negatively centered, as volatility increases. Finally, we show that the co-jumps yield an economically-meaningful portion of leverage, return skewness, and the implied volatility smirk. These effects are uncovered in the context of a flexible modeling approach (allowing, among other features, for independent as well as common jumps, volatility-dependent jump arrivals, and time-varying leverage) and a novel identification strategy relying on infinitesimal cross-moments and high-frequency price data.