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Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns

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Author Info
Torben G. Andersen
Tim Bollerslev
Per Houmann Frederiksen
Morten Ørregaard Nielsen () (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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Abstract

We provide an empirical framework for assessing the distributional properties of daily specu- lative returns within the context of the continuous-time modeling paradigm 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 relatively simple-to-implement moment-based tests involving various transforms of the daily returns speak directly to the import of different features of the under- lying continuous-time processes that might have generated the data. As such, the tests may serve as a useful diagnostic tool in the specification of empirically more realistic asset pricing models. Our results are also directly related to the popular mixture-of-distributions hypoth- esis and the role of the corresponding latent information arrival process. On applying our sequential test procedure to the thirty individual stocks in the Dow Jones Industrial Average index, the data suggest that it is important to allow for both time-varying diffusive volatility, jumps, and leverage effects in order to satisfactorily describe the daily stock price dynamics. At a broader level, the empirical results also illustrate how the realized variation measures and high-frequency sampling schemes may be used in eliciting important distributional features and asset pricing implications more generally.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2007-21.

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Date of creation: 16 Aug 2007
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Handle: RePEc:aah:create:2007-21

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Related research
Keywords: Return distributions; continuous-time models; mixture-of-distributions hypothesis; financial-time sampling; high-frequency data; volatility signature plots; realized volatilities; jumps; leverage and volatility feedback effects;

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Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
G1 - Financial Economics - - General Financial Markets

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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.:
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Cited by:
(explanations, 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.)

  1. Hurvich, Clifford & Wang, Yi, 2009. "A Pure-Jump Transaction-Level Price Model Yielding Cointegration, Leverage, and Nonsynchronous Trading Effects," MPRA Paper 12575, University Library of Munich, Germany. [Downloadable!]
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  2. Torben G. Andersen & Tim Bollerslev & Xin Huang, 2007. "A Reduced Form Framework for Modeling Volatility of Speculative Prices based on Realized Variation Measures," CREATES Research Papers 2007-14, School of Economics and Management, University of Aarhus. [Downloadable!]
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