Sluggish news reactions: A combinatorial approach for synchronizing stock jumps

TL;DR

This paper introduces a combinatorial approach to synchronize stock jumps, enabling more accurate detection of true common jumps by addressing sluggish reactions and jump delays in stock prices.

Contribution

It proposes a novel method for synchronizing stock jumps on a fine sampling grid, improving the detection of true common jumps beyond traditional microstructure-based approaches.

Findings

Enhanced jump detection accuracy

Better approximation of true common jumps

Effective handling of sluggish reactions and delays

Abstract

Stock prices often react sluggishly to news, producing gradual jumps and jump delays. Econometricians typically treat these sluggish reactions as microstructure effects and settle for a coarse sampling grid to guard against them. Synchronizing mistimed stock returns on a fine sampling grid allows us to automatically detect noisy jumps and better approximate the true common jumps in related stock prices.