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Simultaneous Occurrence of Price Jumps and Changes in Diffusive Price Volatility

By Shunting Wei

This paper uses high frequency financial data to study the changes in diffusive stock price volatility when price jumps are likely to have occurred. In particular, we study this effect on two levels. Firstly, we compare diffusive volatility on jump and non-jump days. Secondly, we study the change in diffusive volatility in local windows before and after 5-minute intervals on which price jumps are likely to have occurred. We find evidence that market price jumps occur simultaneously with a change in diffusive volatility with negative dependence in the direction of the jump and the volatility change. However, a similar relationship is not detectable in individual stock price data.

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Advisor: George Tauchen | JEL Codes: C22, G1, G19 | Tagged: Diffusive Volatility, Jump Tests, Realized Volatility, Stock Price Jumps

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