Roughing It Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility

DMCA

Roughing It Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility (2006)

Cached

Download Links

by Torben G. Andersen , Tim Bollerslev , Francis X. Diebold

Venue:	REVIEW OF ECONOMICS AND STATISTICS, FORTHCOMING
Citations:	165 - 11 self

BibTeX

@MISC{Andersen06roughingit,
    author = {Torben G. Andersen and Tim Bollerslev and Francis X. Diebold},
    title = {Roughing It Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility },
    year = {2006}
}

OpenURL

Abstract

A rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from high-frequency returns coupled with simple modeling procedures. Building on recent theoretical results in Barndorff-Nielsen and Shephard (2004a, 2005) for related bi-power variation measures, the present paper provides a practical and robust framework for non-parametrically measuring the jump component in asset return volatility. In an application to the DM/ $ exchange rate, the S&P500 market index, and the 30-year U.S. Treasury bond yield, we find that jumps are both highly prevalent and distinctly less persistent than the continuous sample path variation process. Moreover, many jumps appear directly associated with specific macroeconomic news announcements. Separating jump from non-jump movements in a simple but sophisticated volatility forecasting model, we find that almost all of the predictability in daily, weekly, and monthly return volatilities comes from the non-jump component. Our results thus set the stage for a number of interesting future econometric developments and important financial applications by separately modeling, forecasting, and pricing the continuous and jump components of the total return variation process.

Keyphrases

return volatility including jump component jump component p500 market index robust framework monthly return volatility many jump high-frequency return simple modeling procedure total return variation process sophisticated volatility specific macroeconomic news announcement non-jump movement important improvement asset return volatility financial return volatility measurement realized variation measure important financial application related bi-power variation measure non-jump component recent theoretical result dm exchange rate continuous sample path variation process 30-year u.s. treasury bond yield present paper interesting future econometric development

DMCA