Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/123821 
Year of Publication: 
2014
Series/Report no.: 
Working Paper No. 2014-08
Publisher: 
Rutgers University, Department of Economics, New Brunswick, NJ
Abstract: 
If the intensity parameter in a jump diffusion model is identically zero, then parameters characterizing the jump size density cannot be identified. In general, this lack of identification precludes consistent estimation of identified parameters. Hence, it should be standard practice to consistently pretest for jumps, prior to estimating jump diffusions. Many currently available tests have power against the presence of jumps over a finite time span (typically a day or a week); and, as already noted by various authors, jumps may not be observed over finite time spans, even if the intensity parameter is strictly positive. Such tests cannot be consistent against non-zero intensity. Moreover, sequential application of finite time span tests usually leads to sequential testing bias, which in turn leads to jump discovery with probability one, in the limit, even if the true intensity is identically zero. This paper introduces tests for jump intensity, based on both in-fill and long-span asymptotics, which solve both the test consistency and the sequential testing bias problems discussed above, in turn facilitating consistent estimation of jump diffusion models. A "self excitement" test is also introduced, which is designed to have power against path dependent intensity, thus providing a direct test for the Hawkes diffusion model of Ait-Sahalia, Cacho-Diaz and Laeven (2013). In a series of Monte Carlo experiments, the proposed tests are evaluated, and are found to perform adequately in finite samples.
Subjects: 
diffusion model
jump intensity
jump size density
sequential testing bias
bootstrap
JEL: 
C12
C22
C52
C55
Document Type: 
Working Paper

Files in This Item:
File
Size
235.18 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.