Jump Diffusion Processes and Emerging Bond and Stock Markets: An Investigation Using Daily Data

The underlying stochastic processes that drive returns in several emerging bond and stock markets are investigated using the pure diffusion, the jump diffusion, the ARCH pure diffusion, and the ARCH jump diffusion models. The results indicate that jump diffusion models fit the data better than pure diffusion models. Possible sources and linkages of information surprises in emerging stock and bond markets are also investigated. Bond and stock returns of the same country exhibit simultaneous jumps, indicating a possible linkage of the two markets. U.S. equity returns respond to jumps in emerging bond markets but not to jumps in emerging stock markets.

[1]  Vasant Naik,et al.  General Equilibrium Pricing of Options on the Market Portfolio with Discontinuous Returns , 1990 .

[2]  Are Jumps in Stock Returns Diversifiable? Evidence and Implications for Option Pricing , 1994 .

[3]  R. Jarrow,et al.  Jump Risks and the Intertemporal Capital Asset Pricing Model , 1984 .

[4]  R. C. Merton,et al.  The impact on option pricing of specification error in the underlying stock price returns , 2011 .

[5]  D. Duffie,et al.  An Overview of Value at Risk , 1997 .

[6]  R. C. Merton,et al.  Option pricing when underlying stock returns are discontinuous , 1976 .

[7]  G. Schwarz.  Estimating the Dimension of a Model , 1978 .

[8]  W. N. Street,et al.  Financial Data and the Skewed Generalized T Distribution , 1998 .

[9]  R. Baillie,et al.  The Message in Daily Exchange Rates , 1989 .

[10]  Thomas Schneeweis,et al.  Jump-diffusion processes in the foreign exchange markets and the release of macroeconomic news , 1994 .

[11]  Philippe Jorion.  On Jump Processes in the Foreign Exchange and Stock Markets , 1988 .

[12]  Jump-Diffusion Processes and the Bond Markets , 1998 .

[13]  W. Torous,et al.  A Simplified Jump Process for Common Stock Returns , 1983, Journal of Financial and Quantitative Analysis.

[14]  Teppo Martikainen,et al.  Prudent margin levels in the Finnish stock index futures market , 1997 .

[15]  G. Geoffrey Booth,et al.  COMPOUND DISTRIBUTION MODELS OF STOCK RETURNS: AN EMPIRICAL COMPARISON , 1987 .

[16]  W. Torous,et al.  On Jumps in Common Stock Prices and Their Impact on Call Option Pricing , 1985 .

[17]  Campbell R. Harvey,et al.  PREDICTABLE RISK AND RETURNS IN EMERGING MARKETS , 1999 .

[18]  R. Chou,et al.  ARCH modeling in finance: A review of the theory and empirical evidence , 1992 .