Advanced Search
MyIDEAS: Login to save this article or follow this journal

Continuous-time models, realized volatilities, and testable distributional implications for daily stock returns

Contents:

Author Info

  • Torben G. Andersen

    (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL, USA, NBER and CREATES)

  • Tim Bollerslev

    (Department of Economics, Duke University, Durham, NC, USA, and CREATES)

  • Per Frederiksen

    (Equity Trading and Derivatives, Nordea Markets, Copenhagen, Denmark)

  • Morten �rregaard Nielsen

    (Department of Economics, Queen's University, Kingston, Ontario, Canada, and CREATES)

Abstract

We provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous-time jump diffusion models traditionally used in asset pricing finance. Our approach builds directly on recently developed realized variation measures and non-parametric jump detection statistics constructed from high-frequency intra-day data. A sequence of simple-to-implement moment-based tests involving various transformations of the daily returns speak directly to the importance of different distributional features, and may serve as useful diagnostic tools in the specification of empirically more realistic continuous-time asset pricing models. On applying the tests to the 30 individual stocks in the Dow Jones Industrial Average index, we find that it is important to allow for both time-varying diffusive volatility, jumps, and leverage effects to satisfactorily describe the daily stock price dynamics. Copyright © 2009 John Wiley & Sons, Ltd.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://hdl.handle.net/10.1002/jae.1105
File Function: Link to full text; subscription required
Download Restriction: no

File URL: http://qed.econ.queensu.ca:80/jae/2010-v25.2/
File Function: Supporting data files and programs
Download Restriction: no

Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 25 (2010)
Issue (Month): 2 ()
Pages: 233-261

as in new window
Handle: RePEc:jae:japmet:v:25:y:2010:i:2:p:233-261

Contact details of provider:
Web page: http://www.interscience.wiley.com/jpages/0883-7252/

Order Information:
Email:
Web: http://www3.interscience.wiley.com/jcatalog/subscribe.jsp?issn=0883-7252

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," American Economic Review, American Economic Association, vol. 93(1), pages 38-62, March.
  2. Bontemps, Christian & Meddahi, Nour, 2007. "Testing Distributional Assumptions: A GMM Approach," IDEI Working Papers 486, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Bollerslev, Tim & Kretschmer, Uta & Pigorsch, Christian & Tauchen, George, 2009. "A discrete-time model for daily S & P500 returns and realized variations: Jumps and leverage effects," Journal of Econometrics, Elsevier, vol. 150(2), pages 151-166, June.
  4. Ole E. Barndorff-Nielsen & Neil Shephard, 2003. "Power and bipower variation with stochastic volatility and jumps," Economics Papers 2003-W17, Economics Group, Nuffield College, University of Oxford.
  5. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  6. Bjørn Eraker & Michael Johannes & Nicholas Polson, 2003. "The Impact of Jumps in Volatility and Returns," Journal of Finance, American Finance Association, vol. 58(3), pages 1269-1300, 06.
  7. Hsieh, David A, 1989. "Modeling Heteroscedasticity in Daily Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 307-17, July.
  8. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2005. "Volatility Forecasting," PIER Working Paper Archive 05-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Christian Bontemps & Nour Meddahi, 2002. "Testing Normality: A GMM Approach," CIRANO Working Papers 2002s-63, CIRANO.
  10. Yacine Aït-Sahalia, 2005. "How Often to Sample a Continuous-Time Process in the Presence of Market Microstructure Noise," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 351-416.
  11. Morten Ørregaard Nielsen & Per Houmann Frederiksen, 2005. "Finite Sample Accuracy of Integrated Volatility Estimators," Working Papers 1225, Queen's University, Department of Economics.
  12. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
  13. Suzanne S. Lee & Per A. Mykland, 2008. "Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2535-2563, November.
  14. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2007. "Roughing It Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility," CREATES Research Papers 2007-18, School of Economics and Management, University of Aarhus.
  15. Chernov, Mikhail & Ronald Gallant, A. & Ghysels, Eric & Tauchen, George, 2003. "Alternative models for stock price dynamics," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 225-257.
  16. Ole E. Barndorff-Nielsen & Neil Shephard, 2002. "Estimating quadratic variation using realized variance," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 457-477.
  17. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
  18. Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  19. Hansen, Peter R. & Lunde, Asger, 2006. "Realized Variance and Market Microstructure Noise," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 127-161, April.
  20. Epps, Thomas W & Epps, Mary Lee, 1976. "The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis," Econometrica, Econometric Society, vol. 44(2), pages 305-21, March.
  21. Ole E. Barndorff-Nielsen & Shephard, 2002. "Econometric analysis of realized volatility and its use in estimating stochastic volatility models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(2), pages 253-280.
  22. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
  23. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  24. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2000. "Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian," NBER Working Papers 7488, National Bureau of Economic Research, Inc.
  25. Peter Reinhard Hansen & Asger Lunde, 2005. "A Realized Variance for the Whole Day Based on Intermittent High-Frequency Data," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(4), pages 525-554.
  26. Kim, Dongcheol & Kon, Stanley J, 1994. "Alternative Models for the Conditional Heteroscedasticity of Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 563-98, October.
  27. Neil Shephard & Matthias Winkel & Ole E. Barndorff-Nielsen, 2005. "Limit theorems for multipower variation in the presence of jumps," Economics Series Working Papers 2005-FE-06, University of Oxford, Department of Economics.
  28. Laszlo Gillemot & J. Doyne Farmer & Fabrizio Lillo, 2005. "There's more to volatility than volume," Papers physics/0510007, arXiv.org.
  29. Ole E. Barndorff-Nielsen & Neil Shephard, 2004. "Econometrics of testing for jumps in financial economics using bipower variation ," OFRC Working Papers Series 2004fe01, Oxford Financial Research Centre.
  30. Nielsen, Morten Ørregaard & Frederiksen, Per, 2008. "Finite sample accuracy and choice of sampling frequency in integrated volatility estimation," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 265-286, March.
  31. Thierry Ané & Hélyette Geman, 2000. "Order Flow, Transaction Clock, and Normality of Asset Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2259-2284, October.
  32. Michiel de Pooter & Martin Martens & Dick van Dijk, 2008. "Predicting the Daily Covariance Matrix for S&P 100 Stocks Using Intraday Data—But Which Frequency to Use?," Econometric Reviews, Taylor & Francis Journals, vol. 27(1-3), pages 199-229.
  33. Anthony Murphy & Marwan Izzeldin, 2005. "Order Flow, Transaction Clock, and Normality of Asset Returns: A Comment on Ané and Geman (2000)," Finance 0512005, EconWPA.
  34. Oomen, Roel C.A., 2006. "Properties of Realized Variance Under Alternative Sampling Schemes," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 219-237, April.
  35. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  36. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
  37. Liesenfeld, Roman, 1998. "Dynamic Bivariate Mixture Models: Modeling the Behavior of Prices and Trading Volume," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(1), pages 101-09, January.
  38. Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
  39. Jiang, George J. & Oomen, Roel C.A., 2008. "Testing for jumps when asset prices are observed with noise-a "swap variance" approach," Journal of Econometrics, Elsevier, vol. 144(2), pages 352-370, June.
  40. Bollerslev, Tim & Jubinski, Dan, 1999. "Equity Trading Volume and Volatility: Latent Information Arrivals and Common Long-Run Dependencies," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 9-21, January.
  41. John M. Maheu & Thomas H. McCurdy, 2004. "News Arrival, Jump Dynamics, and Volatility Components for Individual Stock Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 755-793, 04.
  42. Xin Huang & George Tauchen, 2005. "The Relative Contribution of Jumps to Total Price Variance," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(4), pages 456-499.
  43. Ole E. Barndorff-Nielsen & Neil Shephard, 2004. "Econometric Analysis of Realized Covariation: High Frequency Based Covariance, Regression, and Correlation in Financial Economics," Econometrica, Econometric Society, vol. 72(3), pages 885-925, 05.
  44. Baillie, Richard T & Bollerslev, Tim, 1989. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 297-305, July.
  45. Tim Bollerslev & Julia Litvinova & George Tauchen, 2006. "Leverage and Volatility Feedback Effects in High-Frequency Data," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(3), pages 353-384.
  46. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
  47. Fleming, Jeff & Kirby, Chris & Ostdiek, Barbara, 2003. "The economic value of volatility timing using "realized" volatility," Journal of Financial Economics, Elsevier, vol. 67(3), pages 473-509, March.
  48. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
  49. Andersen, Torben G. & Bollerslev, Tim & Dobrev, Dobrislav, 2007. "No-arbitrage semi-martingale restrictions for continuous-time volatility models subject to leverage effects, jumps and i.i.d. noise: Theory and testable distributional implications," Journal of Econometrics, Elsevier, vol. 138(1), pages 125-180, May.
  50. Todorov, Viktor, 2011. "Econometric analysis of jump-driven stochastic volatility models," Journal of Econometrics, Elsevier, vol. 160(1), pages 12-21, January.
  51. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  52. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
  53. Bjørn Eraker, 2004. "Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1367-1404, 06.
  54. Andersen, Torben G, 1996. " Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
  55. Christensen, Kim & Podolskij, Mark, 2007. "Realized range-based estimation of integrated variance," Journal of Econometrics, Elsevier, vol. 141(2), pages 323-349, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:jae:japmet:v:25:y:2010:i:2:p:233-261. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.