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Testing for mutually exciting jumps and financial flights in high frequency data

journal contribution
posted on 2023-05-19, 12:43 authored by Dungey, M, Erdemlioglu, D, Matei, M, Yang, X
We propose a new nonparametric test to identify mutually exciting jumps in high frequency data. We derive the asymptotic properties of the test statistics and show that the tests have good size and reasonable power in finite sample cases. Using our mutual excitation tests, we empirically characterize the dynamics of financial flights in forms of flight-to-safety and flight-to-quality. The results indicate that mutually exciting jumps and risk-off trades mostly occur in periods of high market stress. Flight-to-safety episodes (from stocks to gold) arrive more frequently than do flightto-quality spells (from stocks to bonds). We further find evidence that reverse cross-excitations or seeking-return-strategies exhibit significant asymmetry over the business cycle, reflecting the fact that investors appear to be selling gold—rather than bonds—to invest in stocks during good market conditions.

History

Publication title

Journal of Econometrics

Volume

202

Pagination

18-44

ISSN

0304-4076

Department/School

TSBE

Publisher

Elsevier Science Sa

Place of publication

Po Box 564, Lausanne, Switzerland, 1001

Rights statement

© 2017 Elsevier B.V

Repository Status

  • Restricted

Socio-economic Objectives

Savings and investments

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