A Jumping Index of Jumping Stocks? An MCMC Analysis of Continuous-Time Models for Individual Stocks

38 Pages Posted: 20 Mar 2009

See all articles by Paulo Rodrigues

Paulo Rodrigues

Maastricht University - Department of Finance

Christian Schlag

Goethe University Frankfurt; Leibniz Institute for Financial Research SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: February 12, 2009

Abstract

This paper examines continuous-time models for the price and volatility processes of individual stocks and the S\&P 100 index via Markov Chain Monte Carlo estimation. We find that the stochastic processes governing individual stocks are rather heterogeneous. A key result of our investigation is that index jumps are not necessarily accompanied by jumps in a large number of individual stocks when we apply the same critical values for a posteriori jump probabilities to the index and the stocks. Albeit on a generally lower level of jump probabilities we can nevertheless distinguish between index jump days where the majority of industrial sectors have high jump probabilities and those where this is not the case. We therefore interpret index jumps in the first scenario as 'macro driven', and as 'statistical jumps' otherwise. Concerning diffusive volatility innovations we find that the first principal component is highly correlated with index variance innovations and can therefore be interpreted as a variance market factor.

Keywords: stochastic volatility, individual stocks, MCMC, volatility factors

JEL Classification: G11, G12

Suggested Citation

Rodrigues, Paulo and Schlag, Christian, A Jumping Index of Jumping Stocks? An MCMC Analysis of Continuous-Time Models for Individual Stocks (February 12, 2009). Available at SSRN: https://ssrn.com/abstract=1361861 or http://dx.doi.org/10.2139/ssrn.1361861

Paulo Rodrigues (Contact Author)

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Christian Schlag

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

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