The Drift Burst Hypothesis
This study investigates the existence, market prevalence, and underlying mechanisms of transient, localized “drift bursts” in financial asset prices. To this end, we incorporate drift bursts into a continuous-time Itô semimartingale framework and develop a theoretical model under no-arbitrage conditions, alongside a nonparametric test statistic designed to reliably detect such events from high-frequency data contaminated by noise. Our work is the first to formally model drift bursts as a regular feature of financial markets, uncovering their intrinsic links to liquidity shocks and price reversals. Empirical analysis reveals that drift bursts are pervasive across equity, bond, foreign exchange, and commodity markets, occurring on average once per week; notably, negative bursts accompanied by high trading volume are more likely to trigger significant price reversals.