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Title: The drift burst hypothesis Authors:  Kim Christensen - Aarhus University (Denmark) [presenting]
Abstract: The usual tenet that volatility dominates over the drift over short time intervals is not necessarily true when the drift term is locally explosive. The Drift Burst Hypothesis postulates the existence of such locally explosive drifts in the price dynamics. We first show that drift explosions can arise naturally in markets with heterogeneous information in which partially informed agents learn from prices. We then lay down a nonparametric identification strategy for drift bursts, which is embedded in the paradigm of traditional continuous-time finance. The empirical application of the test shows that the occurrence rate of drift bursts is quite large, and that they can most often be associated to flash crashes, since the return during a drift burst tends to revert immediately thereafter. This allows to contrast existing theories describing the impact of illiquidity frictions on price dynamic formation.