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Journal of Financial Econometrics Advance Access originally published online on August 12, 2005
Journal of Financial Econometrics 2005 3(4):456-499; doi:10.1093/jjfinec/nbi025
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© The Author 2005. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org.

The Relative Contribution of Jumps to Total Price Variance

Xin Huang
     Duke University

George Tauchen
     Duke University

Address correspondence to George Tauchen, Department of Economics, Duke University, Box 90097, Durham, NC 27708, or E-mail: george.tauchen{at}duke.edu.

We examine tests for jumps based on recent asymptotic results; we interpret the tests as Hausman-type tests. Monte Carlo evidence suggests that the daily ratio z-statistic has appropriate size, good power, and good jump detection capabilities revealed by the confusion matrix comprised of jump classification probabilities. We identify a pitfall in applying the asymptotic approximation over an entire sample. Theoretical and Monte Carlo analysis indicates that microstructure noise biases the tests against detecting jumps, and that a simple lagging strategy corrects the bias. Empirical work documents evidence for jumps that account for 7% of stock market price variance.

KEYWORDS: bipower variation, quadratic variation, realized variance, stochastic volatility

Received April 1, 2004; revised March 17, 2005; accepted July 4, 2005


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