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Journal of Financial Econometrics Advance Access published online on August 12, 2005
Journal of Financial Econometrics, doi:10.1093/jjfinec/nbi025
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Received April 1, 2005
Revised March 17, 2005
Accepted July 4, 2005

Article

The Relative Contribution of Jumps to Total Price Variance

Xin Huang 1 and George Tauchen 1*
     1 Duke University

* To whom correspondence should be addressed.
George Tauchen, E-mail: george.tauchen{at}duke.edu


  Abstract

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.
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