The effect of infrequent trading on detecting price jumps

The subject of the present study is to analyze how accurately an elaborated price jump detection methodology by Barndorff-Nielsen and Shephard (J. Financ. Econom. 2:1–37, 2004a; 4:1–30, 2006) applies to financial time series characterized by less frequent trading. In this context, it is of primary interest to understand the impact of infrequent trading on two test statistics, applicable to disentangle contributions from price jumps to realized variance. In a simulation study, evidence is found that infrequent trading induces a sizable distortion of the test statistics towards overrejection. A new empirical investigation using high frequency information of the most heavily traded electricity forward contract of the Nord Pool Energy Exchange corroborates the evidence of the simulation. In line with the theory, a “zero-return-adjusted estimation” is introduced to reduce the bias in the test statistics, both illustrated in the simulation study and empirical case.