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

Abstract : 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 flight-to-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.
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Submitted on : Monday, November 9, 2020 - 1:58:34 PM
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Mardi Dungey, Deniz Erdemlioglu, Marius Matei, Xiye Yang. Testing for mutually exciting jumps and financial flights in high frequency data. Journal of Econometrics, Elsevier, 2018, 202 (1), pp.18-44. ⟨10.1016/j.jeconom.2017.09.002⟩. ⟨hal-02995949⟩

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