The profitability of trading on large Lévy jumps

Kam Fong Chan, Phil Gray, Zheyao Pan

Research output: Contribution to journalLetterResearchpeer-review

Abstract

While past research has studied the profitability of trading based on jump signals, the notion of differentiating between jumps according to their magnitude has received relatively little attention. We utilize the approach of Lee and Hannig (2010) to identify Lévy jumps and classify them as small and large. The empirical analysis shows that the arrival of large Lévy jumps provides a strong trading signal in five major equity markets. In contrast, the signal from small Lévy jumps is negligible.

Original languageEnglish
Number of pages9
JournalInternational Review of Finance
DOIs
Publication statusAccepted/In press - 2019

Keywords

  • high-frequency trading
  • jump trading strategy
  • Lévy jumps

Cite this

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title = "The profitability of trading on large L{\'e}vy jumps",
abstract = "While past research has studied the profitability of trading based on jump signals, the notion of differentiating between jumps according to their magnitude has received relatively little attention. We utilize the approach of Lee and Hannig (2010) to identify L{\'e}vy jumps and classify them as small and large. The empirical analysis shows that the arrival of large L{\'e}vy jumps provides a strong trading signal in five major equity markets. In contrast, the signal from small L{\'e}vy jumps is negligible.",
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author = "Chan, {Kam Fong} and Phil Gray and Zheyao Pan",
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The profitability of trading on large Lévy jumps. / Chan, Kam Fong; Gray, Phil; Pan, Zheyao.

In: International Review of Finance, 2019.

Research output: Contribution to journalLetterResearchpeer-review

TY - JOUR

T1 - The profitability of trading on large Lévy jumps

AU - Chan, Kam Fong

AU - Gray, Phil

AU - Pan, Zheyao

PY - 2019

Y1 - 2019

N2 - While past research has studied the profitability of trading based on jump signals, the notion of differentiating between jumps according to their magnitude has received relatively little attention. We utilize the approach of Lee and Hannig (2010) to identify Lévy jumps and classify them as small and large. The empirical analysis shows that the arrival of large Lévy jumps provides a strong trading signal in five major equity markets. In contrast, the signal from small Lévy jumps is negligible.

AB - While past research has studied the profitability of trading based on jump signals, the notion of differentiating between jumps according to their magnitude has received relatively little attention. We utilize the approach of Lee and Hannig (2010) to identify Lévy jumps and classify them as small and large. The empirical analysis shows that the arrival of large Lévy jumps provides a strong trading signal in five major equity markets. In contrast, the signal from small Lévy jumps is negligible.

KW - high-frequency trading

KW - jump trading strategy

KW - Lévy jumps

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U2 - 10.1111/irfi.12279

DO - 10.1111/irfi.12279

M3 - Letter

JO - International Review of Finance

JF - International Review of Finance

SN - 1369-412X

ER -