Jump detection with wavelets for high-frequency financial time series

Abstract

This paper introduces a new nonparametric test to identify jump arrival times in high frequency financial time series data. The asymptotic distribution of the test is derived. We demonstrate that the test is robust for different specifications of price processes and the presence of the microstructure noise. A Monte Carlo simulation is conducted which shows that the test has good size and power. Further, we examine the multi-scale jump dynamics in US equity markets. The main findings are as follows. First, the jump dynamics of equities are sensitive to data sampling frequency with significant underestimation of jump intensities at lower frequencies. Second, although arrival densities of positive jumps and negative jumps are symmetric across different time scales, the magnitude of jumps is distributed asymmetrically at high frequencies. Third, only 20% of jumps occur in the trading session from 9:30 AM to 4:00 PM, suggesting that illiquidity during after-hours trading is a strong determinant of jumps.