Disentangling the Effect of Jumps on Systematic Risk Using A New Estimator of Integrated Co-volatility
Kent Wang, Junwei Liu, Zhi Liu
Journal of Banking & Finance
#002184 20131014 (published)
We propose a new threshold杙re-averaging realized estimator for the integrated co-volatility of two assets using non-synchronous observations with the simultaneous presence of microstructure noise and jumps. We derive a noise-robust Hayashi朰oshida estimator that allows for very general structure of jumps in the underlying process. Based on the new estimator, different aspects and components of co-volatility are compared to examine the effect of jumps on systematic risk using tick-by-tick data from the Chinese stock market during 2009?011. We find controlling for jumps contributes significantly to the beta estimation and common jumps mostly dominate the jump抯 effect, but there is also evidence that idiosyncratic jumps may lead to significant deviation. We also find that not controlling for noise and jumps in previous realized beta estimations tend to considerably underestimate the systematic risk.
JEL-Codes: C13, C14, G10, G12
Keywords: Ito semi-martingale, High-frequency finance, Co-volatility, Non-synchronous trading, Idiosyncratic jumps, Co-jump, Microstructure noise

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