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Price and volatility co-jumps

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  • Bandi, F.M.
  • Renò, R.

Abstract

The nature of the dependence between discontinuities in prices and contemporaneous discontinuities in volatility (co-jumps) has been reported by many as being elusive, in terms of sign, magnitude, and statistical significance. Using a novel identification strategy in continuous time relying on trade-level information for spot variance estimation, as well as infinitesimal cross-moments, we document that a sizeable proportion of discontinuous changes in prices are associated with strongly anti-correlated, contemporaneous, discontinuous changes in volatility. Assuming a possibly nonmonotonic pricing kernel, we illustrate the equilibrium implications of price and volatility co-jumps for return and variance risk premia.

Suggested Citation

  • Bandi, F.M. & Renò, R., 2016. "Price and volatility co-jumps," Journal of Financial Economics, Elsevier, vol. 119(1), pages 107-146.
    • Handle: RePEc:eee:jfinec:v:119:y:2016:i:1:p:107-146
    DOI: 10.1016/j.jfineco.2015.05.007
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    More about this item

    Keywords

    Stochastic volatility; Jumps in prices; Jumps in volatility; Co-jumps; Infinitesimal cross-moments; Return risk premia; Variance risk premia;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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