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December 21, 2014

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Wing Hong Chan

Conditional Jump Dynamics in Stock Market Returns (ABSTRACT)


Chan, W.H., & Maheu, J.M.

published: 2002 | Research publication | Refereed Journals - Economics

Chan, W.H., & Maheu, J.M. (2002). "Conditional Jump Dynamics in Stock Market Returns". Journal of Business and Economic Statistics, 20 (3), 337-389.


ABSTRACT: This paper develops a new conditional jump model to study jump dynamics in stock market returns. We propose a simple filter to infer ex post the distribution of jumps. This permits construction of the shock affecting the time t conditional jump intensity, and is the main input into an autoregressive conditional jump intensity model. The model allows the conditional jump intensity to be time-varying and follows an approximate ARMA form. The time-series characteristics of 72 years of daily stock returns are analyzed using the jump model coupled with a GARCH specification of volatility. We find significant time-variation in the conditional jump intensity and evidence of time-variation in the jump size distribution. The conditional jump dynamics contribute to a good in-sample and out-of-sample fit to stock market volatility, and capture the rally often observed in equity markets following a significant downturn.

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revised Nov 11/04

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