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Measuring the Jump Risk Contribution under Market Microstructure Noise – Evidence from Chinese Stock Market

Author

Listed:
  • Chao YU

    (School of Statistics, University of International Business and Economics, Beijing, P.R.China)

  • Xujie ZHAO

    (School of International Trade and Economics, University of International Business and Economics, Beijing, P.R.China. Corresponding author.)

Abstract

In this paper, we use the pre-averaging threshold method to measure the contribution of jump variation to the total price variation under the effect of market microstructure noise with financial high frequency data. We first show the advantages of our method by Monte Carlo simulation. Then, we apply the pre-averaging threshold estimator and bi-power variation estimator for comparison to the intraday data of Chinese stock market at different frequencies. The empirical results show that for the most stocks in our sample, the jump contribution estimated by noise-robust estimator at tick frequency is larger than the result at five-minute frequency, which is different from the result for US market that the jump variation is overestimated with lower-frequency data in Christensen et al. (2014). Moreover, jump jump component is an important contributor to the total risk in Chinese stock market.

Suggested Citation

  • Chao YU & Xujie ZHAO, 2021. "Measuring the Jump Risk Contribution under Market Microstructure Noise – Evidence from Chinese Stock Market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 32-47, December.
  • Handle: RePEc:rjr:romjef:v::y:2021:i:1:p:32-47
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    References listed on IDEAS

    as
    1. Ole E. Barndorff-Nielsen & Neil Shephard, 2002. "Estimating quadratic variation using realized variance," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 457-477.
    2. Christensen, Kim & Oomen, Roel C.A. & Podolskij, Mark, 2014. "Fact or friction: Jumps at ultra high frequency," Journal of Financial Economics, Elsevier, vol. 114(3), pages 576-599.
    3. Bing-Yi Jing & Zhi Liu & Xin-Bing Kong, 2014. "On the Estimation of Integrated Volatility With Jumps and Microstructure Noise," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 32(3), pages 457-467, July.
    4. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2007. "Roughing It Up: Including Jump Components in the Measurement, Modeling, and Forecasting of Return Volatility," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 701-720, November.
    5. Jacod, Jean & Li, Yingying & Mykland, Per A. & Podolskij, Mark & Vetter, Mathias, 2009. "Microstructure noise in the continuous case: The pre-averaging approach," Stochastic Processes and their Applications, Elsevier, vol. 119(7), pages 2249-2276, July.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    financial high frequency data; jump risk contribution; market microstructure noise; pre-averaging;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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