Department of Economics and Business Economics

Kim Christensen

The drift burst hypothesis

Research output: Working paperResearch


  • rp18_21

    Final published version, 2.07 MB, PDF document

  • Kim Christensen
  • Roe Oomen, Deutsche Bank, London and Department of Statistics, London School of Economics, United Kingdom
  • Roberto Renò, Department of Economics, University of Verona, Italy
The drift burst hypothesis postulates the existence of short-lived locally explosive trends in the price paths of financial assets. The recent US equity and treasury flash crashes can be viewed as two high profile manifestations of such dynamics, but we argue that drift bursts of varying magnitude are an expected and regular occurrence in financial markets that can arise through established mechanisms of liquidity provision. We show how to build drift bursts into the continuous-time Itô semimartingale model, discuss the conditions required for the process to remain arbitrage-free, and propose a nonparametric test statistic that identifies drift bursts from noisy highfrequency data. We apply the test to demonstrate that drift bursts are a stylized fact of the price dynamics across equities, fixed income, currencies and commodities. Drift bursts occur once a week on average, and the majority of them are accompanied by subsequent price reversion and can thus be regarded as “flash crashes”. The reversal is found to be stronger for negative drift bursts with large trading volume, which is consistent with endogenous demand for immediacy during market crashes.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages58
Publication statusPublished - 20 Aug 2018
SeriesCREATES Research Papers

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