Detecting Price Jumps in the Presence of Market Microstructure Noise

In this paper we design a test to detect the arrivals of jumps in asset prices contaminated by market microstructure noise. This test is defined by means of the truncated two-scales realized volatility estimator, recently introduced in Brownlees, Nualart, and Sun (2016), which is a robust estimator of the realized volatility in the presence of price jumps and market microstructure noise. We derive the asymptotic value of the power of the test given the significance level, and provide conditions for the test to be consistent. Simulations show that the test performs satisfactorily when the sampling frequency is large. In particular, we show that the test performs better than some prevalent jump tests.