Venue: Economics Building, via Inama 5 (Trento) - seminar room
- Roberto Renò - University of Verona
The drift burst hypothesis postulates the existence of short-lived locally explosive trends in the price paths of ﬁnancial assets. The recent US equity and treasury ﬂash crashes can be viewed as two high proﬁle manifestations of such dynamics, but we argue that drift bursts of varying magnitude are an expected and regular occurrence in ﬁnancial markets that can arise through established mechanisms of liquidity provision. We show how to build drift bursts into the continuous-time Itô semimartingale model, discuss the conditions required for the process to remain arbitrage-free, and propose a nonparametric test statistic that identiﬁes drift bursts from noisy high-frequency data. We apply the test to demonstrate that drift bursts are a stylized fact of the price dynamics across equities, ﬁxed income, currencies and commodities. Drift bursts occur once a week on average, and the majority of them are accompanied by subsequent price reversion and can thus be regarded as “ﬂash crashes.” The reversal is found to be stronger for negative drift bursts with large trading volume, which is consistent with endogenous demand for immediacy during market crashes.