Modelling and testing for jumps in the prices of financial assets

The third essay, entitled “Jumps and price discovery in the US Treasury market”, explores different aspects related to the price discovery process for the US Treasury bonds when jumps occur. We identify and estimate jumps in the US Treasury 2-, 5-,10- and 30-year bonds both on a daily basis, by using the standard Barndorff-Nielsen and Shephard (2004) test for jumps, as well as at an intraday level, by applying the Lee and Mykland (2008) procedure. Results show that US Treasury bonds exhibit jumps in their prices in 14.5% of the days for the 2-year maturity, in 10.6% for the 5-year bond, 9.6% for the 10-year and finally in 17.91% of the days for the 30-year bond. We find that in the 5 minutes before a jump, liquidity withdraws, and then it rises again. The trading volume falls in the 5-10 minutes before a jump takes place and increases again afterward. Around 90% of the jumps occur at the same time or slightly after macroeconomic announcements and the standardized announcement surprise is revealed to be an important determinant of the probability of jump occurrence. The trading information is found to have a low impact on prices before a jump takes place, which increases to a very high level immediately after the jump and then dissipates gradually, maintaining itself at quite high levels up to 20 minutes after a jump occurs.