Finanancial Engineering Seminar Series
Flash Crashes, Jumps and Running Jumps:
A New Method for Jump Detection
BY: Alan Hawkes
Emeritus Professor, Swansea University Business School
ABSTRACT: While developing a new jump-diffusion process for asset prices in which identifiable price jumps are likely to show a clustering, or contagious effect, we need to identify the number, location and magnitudes of jumps each trading day in a series of S&P500 prices recorded every two minutes. We used a jump detection method based on the difference between daily Realized Volatility and Bi-power Variation (call this the RV-BV method) proposed by Barndorff-Nielsen and Shephard (2002, 2004) and Andersen et al (2010).
Surprisingly, we find no indication of jumps occurred on flash-crash day (06 May, 2010) and other similar days. The fundamental problem of this method is that it cannot tolerate large variations in consecutive intervals, which can cause the bi-power variation to exceed the daily realized volatility, and consequently leads the jump detection to be null.
Our new jump detection method is based on finding individual 2-minute returns that are large compared to a local volatility measure that uses a median approach to avoid the masking effects that often occur with mean realized volatility based measures.
We further introduce “running jumps” aimed explicitly at studying the occurrence of sequences of large neighboring returns that effectively form a single jump that evolves over a number of successive intervals.
We test our methods on S&P500 price behavior between 03 January 2006 and 13 March 2015, both intraday and inter-day. We find that our method, in comparison to RV-BV method, robustly captures significant jumps and jump runs on the Mini Flash Crash day and other days when there are market events triggering sharp volatility variations.
BIO: After obtaining First Class Honours in Mathematics at King's College London, Alan moved to UCL where he completed a PhD on queuing theory applied to road traffic (supervisor M.S. Bartlett), while also lecturing in the Statistics Department. He was then, for five years, Reader (equivalent to US Associate Professor) in Mathematical Statistics at Durham University before becoming full Professor of Statistics at Swansea in 1974 — still there as Honorary Research Professor.
He has served on the Council of the Royal Statistical Society and the International Committee of the Biometric Society and was formerly a member of the New York Academy of Sciences.
In the early 1970s Alan published a series of five articles on self-exciting and mutually-exciting point processes that later came to be known in the literature as Hawkes Processes. These were quickly taken up by people analysing earthquake sequences, but were otherwise largely ignored
Meanwhile, Alan moved on to other applications of applied stochastic modelling. His major scientific achievement, in conjunction with David Colquhoun FRS, Professor of Pharmacology at UCL has been pioneering the development of stochastic models for the dynamics of ion channels in biological membranes. These are essential links in the communication system that carries messages around the body, and are important sites of drug action. The ideas and techniques that Alan and David developed are used extensively by Pharmacologists, Physiologists and Neuroscientists.
Since about 2000, Hawkes Processes suddenly became very popular and started to be applied to a wide range of phenomena to describe gang warfare in LA, burglaries, genetics, e-marketing, quantum physics etc. as well as undergoing further theoretical development by mathematicians.
Since about 2005, the most active field of application has been in the finance literature and, in 2012, Dr. Maggie Chen persuaded Alan to rekindle his interest in Hawkes Processes, learn something about finance and make a contribution to the research of the quantitative finance group in Swansea. Maggie and Dr Mike Buckle have recently moved to different universities, but our joint work continues, including collaborative projects with members of Stevens Institute.
8:00 am to 5:00 pm
The 6th Annual Conference on High Frequency Finance and Data Analytics (HF2015) will be held October 29-31, 2015 at the Stevens Institute of Technology in Hoboken, NJ. The HF2015 Conference will focus on sharing the latest research and model applications for data sampled with high frequency. This three-day conference will gather key thought leaders from academia, industry and government from across the globe in the areas of mathematical finance, financial engineering, quantitative finance, stochastic processes and applications and more. The conference will feature graduate students research, and for the first time a recruiting event and data provider talks about the utility and availability of financial datasets. A dinner cruise on the Hudson River overlooking the Manhattan skyline will provide ample networking opportunities.
DeBaun Auditorium, Stevens Institute of Technology
HOW TO FAIL LESS
Join Simon Nynens, Chairman & CEO, Wayside Technology Group and Chairman of the Board of the New Jersey Technology Council, to hear about lessons he learned while building his career and company. Simon will share examples of what not to do, anecdotes and stories about what worked and what did not. This interactive discussion will focus on an honest assessment and lessons for others about how to fail less.
Simon joined Wayside in 1998 and held various positions, including Executive Vice President, Chief Financial Officer and Chief Operating Officer. Prior to joining Wayside Technology Group, he worked for Ernst & Young in Amsterdam. Simon was appointed President and Chief Executive Officer of Wayside Technology Group in January 2006, and appointed Chairman of the Board in June 2006.
Simon received the Ernst & Young Entrepreneur of the Year® 2011 New Jersey Award in the Technology Services category. A graduate of the advanced management Program at Harvard Business School, Simon also serves as Chairman of the Board of the New Jersey Technology Council, and of the New Jersey Chapter of the Young Presidents Organization.
Poster & Networking Reception
(immediately following lecture in Walker Gymnasium)
After the Thomas H. Scholl Lecture, engage with students and faculty as this year’s I&E Summer Scholars and Stevens Scholars present their summer research projects. Explore findings and take advantage of opportunities for collaboration and innovation.
More information is available at www.stevens.edu/provost/oie/nynens
Undergraduate Reading Day
9:00 am to 5:00 pm
Babbio 104, The Babbio Center
The School of Business at Stevens Institute of Technology emphasizes a tested brand of technical leadership development that puts you at the center of a dynamic, energized learning environment where you will find the keys to your own style of self-directed, empowered leadership. This approach is based on extensive research and work with dozens of companies that have demonstrated the value of learning leadership skills by actively putting them in practice. This workshop is intended for technical leaders who hold themselves accountable for continually increasing their own and others’ capacity for cross-company collaboration and rapid innovation. Our faculty experts will show you how to use tools that are readily applicable to your organizational challenges to learn how to stimulate creative thinking, make practical use of conflict, and build collaborative group structures and practices that people enjoy using. The workshop will feature extensive exercises in which you will work in small groups to master the techniques presented by faculty experts. If you have responsibility for technical aspects of an organization that has R&D, engineering or computer-related technologies at the core, we will encourage you to think differently about your responsibilities, the way you manage projects and teams, and how you can work with and inspire people in your organization to take on enterprise-level challenges. In addition to the workshop, Stevens will host a professional networking event for participants to meet faculty, researchers, and senior administrators.
Learn more about the Leading Creative Collaborations Workshop