Department of Economics and Business Economics

The drift burst hypothesis

Research output: Working paperResearch

Standard

The drift burst hypothesis. / Christensen, Kim; Oomen, Roe; Renò, Roberto.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2018.

Research output: Working paperResearch

Harvard

Christensen, K, Oomen, R & Renò, R 2018 'The drift burst hypothesis' Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

Christensen, K., Oomen, R., & Renò, R. (2018). The drift burst hypothesis. Aarhus: Institut for Økonomi, Aarhus Universitet. CREATES Research Papers, No. 2018-21

CBE

Christensen K, Oomen R, Renò R. 2018. The drift burst hypothesis. Aarhus: Institut for Økonomi, Aarhus Universitet.

MLA

Christensen, Kim, Roe Oomen and Roberto Renò The drift burst hypothesis. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2018-21). 2018., 58 p.

Vancouver

Christensen K, Oomen R, Renò R. The drift burst hypothesis. Aarhus: Institut for Økonomi, Aarhus Universitet. 2018 Aug 20.

Author

Christensen, Kim ; Oomen, Roe ; Renò, Roberto. / The drift burst hypothesis. Aarhus : Institut for Økonomi, Aarhus Universitet, 2018. (CREATES Research Papers; No. 2018-21).

Bibtex

@techreport{210debbc062240f2882a111d9e5c553a,
title = "The drift burst hypothesis",
abstract = "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 It{\^o} 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.",
keywords = "flash crashes, gradual jumps, volatility bursts, liquidity, nonparametric statistics, microstructure noise",
author = "Kim Christensen and Roe Oomen and Roberto Ren{\`o}",
year = "2018",
month = "8",
day = "20",
language = "English",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - The drift burst hypothesis

AU - Christensen, Kim

AU - Oomen, Roe

AU - Renò, Roberto

PY - 2018/8/20

Y1 - 2018/8/20

N2 - 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.

AB - 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.

KW - flash crashes, gradual jumps, volatility bursts, liquidity, nonparametric statistics, microstructure noise

M3 - Working paper

BT - The drift burst hypothesis

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -