Some like it smooth, and some like it rough: untangling continuous and jump components in measuring, modeling, and forecasting asset return volatility

A rapidly growing literature has documented important improvements in volatility measurement and forecasting performance through the use of realized volatilities constructed from high-frequency returns coupled with relat
A rapidly growing literature has documented important improvements in volatility measurement and forecasting performance through the use of realized volatilities constructed from high-frequency returns coupled with relatively simple reduced-form time series modeling procedures. Building on recent theoretical results from Barndorff-Nielsen and Shephard (2003c,d) for related bi-power variation measures involving the sum of high-frequency absolute returns, the present paper provides a practical framework for non-parametrically measuring the jump component in realized volatility measurements. Exploiting these ideas for a decade of high-frequency five-minute returns for the DM/$ exchange rate, the S&P500 market index, and the 30-year U.S. Treasury bond yield, we find the jump component of the price process to be distinctly less persistent than the continuous sample path component. Explicitly including the jump measure as an additional explanatory variable in an easy-to-implement reduced form model for realized volatility results in highly significant jump coefficient estimates at the daily, weekly and quarterly forecast horizons. As such, our results hold promise for improved financial asset allocation, risk management, and derivatives pricing, by separate modeling, forecasting and pricing of the continuous and jump components of total return variability.
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Metadaten
Author:Torben G. Andersen, Tim Bollerslev, Francis X. Diebold
URN:urn:nbn:de:hebis:30-10409
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2003,35
Series (Serial Number):CFS working paper series (2003, 35)
Document Type:Working Paper
Language:English
Year of Completion:2003
Year of first Publication:2003
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Continuous-time methodsc; bi-power variation; high-frequency data; jumps; quadratic variation; realized volatility; volatility forecasting
SWD-Keyword:Messung; Prognose; Volatilität
Issue:This Version: September 2003
Pagenumber:42
Note:
First Draft: February 2003. This Version: September 2003.
HeBIS PPN:203810260
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:C1 Econometric and Statistical Methods: General
G1 General Financial Markets
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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