publication . Research . 2016

The drift burst hypothesis

Christensen, Kim; Oomen, Roel; Renò, Roberto;
Open Access English
  • Published: 28 Sep 2016
  • Publisher: Institut for Økonomi, Aarhus Universitet
  • Country: Denmark
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 such as feedback trading. At a theoretical level, we show how to build drift bursts into the continuous-time Itô semi-martingale model in such a way that the fundamental arbitrage-free property is preserved. We then develop a non-parametric test statistic that allo...
Subjects
free text keywords: flash crashes, gradual jumps, volatility bursts, liquidity, nonparametric statistics, microstructure noise, flash crashes, drift bursts, volatility bursts, nonparametric statistics, reversals
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