Detecting price jumps in the presence of market microstructure noise

ABSTRACT

In this paper we design a test to detect the arrivals of jumps in asset prices contaminated by market microstructure noise. This test is defined by means of the truncated two-scales realised volatility estimator, recently introduced in Brownlees, Nualart, and Sun [2019, ‘On the Estimation of Integrated Volatility in the Presence of Jumps and Microstructure Noise’, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2791342.], which is a robust estimator of the realised volatility in the presence of price jumps and market microstructure noise. We derive the asymptotic value of the power of the test given the significance level, and provide conditions for the test to be consistent. Simulations show that the test performs satisfactorily when the sampling frequency is high. In particular, we show that the test performs better than some prevalent jump tests. We also provide a real data example to illustrate the proposed method.

KEYWORDS:

• Jumps
• market microstructure noise
• high-frequency price data

AMS 2010 SUBJECT CLASSIFICATIONS:

• 62G05
• 62G10
• 62G20

Acknowledgements

The author would like to thank the editor, an associate editor and two anonymous reviewers for their valuable comments which helped to improve this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by The National Social Science Fund of China [grant number 18VFH005].