The Fine Structure of Asset Returns: An Empirical Investigation

Peter Carr, Hélyette Geman, Dilip B. Madan, Marc Vor

Research output: Contribution to journalArticle

Abstract

We investigate the importance of diffusion and jumps in a new model for asset returns. In contrast to standard models, we allow for jump components displaying finite or infinite activity and variation. Empirical investigations of time series indicate that index dynamics are devoid of a diffusion component, which may be present in the dynamics of individual stocks. This leads to the conjecture, confirmed on options data, that the risk-neutral process should be free of a diffusion component. We conclude that the statistical and risk-neutral processes for equity prices are pure jump processes of infinite activity and finite variation.

Original languageEnglish (US)
Pages (from-to)305-332
Number of pages28
JournalJournal of Business
Volume75
Issue number2
DOIs
StatePublished - Apr 2002

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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