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Realized Volatility and Multipower Variation

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  • Torben G. Andersen

    ()
    (Kellogg School of Management, Northwestern University and CREATES)

  • Viktor Todorov

    ()
    (Kellogg School of Management, Northwestern University)

Abstract

This paper reviews basic notions of return variation in the context of a continuous-time arbitrage-free asset pricing model and discusses some of their applications. We first define return variation in the infeasible continuous-sampling case. Then we introduce realized measures obtained from high-frequency observations which provide consistent and asymp- totically normal estimates of the underlying return variation. The paper discusses applications of these measures for reduced-form volatility mod- eling and forecasting as well as testing for the presence of jumps.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-49.

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Length: 14
Date of creation: 01 May 2009
Date of revision:
Handle: RePEc:aah:create:2009-49

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: realized volatility; multipower variation; jumps; quadratic variation; volatility estimation; volatility forecasting; jump testing; continuous-time stochastic volatility model.;

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References

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  1. Torben G. Andersen & Tim Bollerslev & Per Frederiksen & Morten Ørregaard Nielsen, 2008. "Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns," Working Papers, Queen's University, Department of Economics 1173, Queen's University, Department of Economics.
  2. Vetter, Mathias & Podolskij, Mark, 2006. "Estimation of Volatility Functionals in the Simultaneous Presence of Microstructure Noise and Jumps," Technical Reports, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen 2006,51, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  3. 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, Elsevier, vol. 144(2), pages 352-370, June.
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  5. 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, Society for Financial Studies, vol. 21(6), pages 2535-2563, November.
  6. Zhou, Bin, 1996. "High-Frequency Data and Volatility in Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 14(1), pages 45-52, January.
  7. Almut Elisabeth Dorothea Veraart, 2007. "Feasible inference for realised variance in the presence of jumps," OFRC Working Papers Series, Oxford Financial Research Centre 2007fe02, Oxford Financial Research Centre.
  8. Federico Bandi & Jeffrey Russell & Yinghua Zhu, 2008. "Using High-Frequency Data in Dynamic Portfolio Choice," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 27(1-3), pages 163-198.
  9. Ole Barndorff-Nielsen & Svend Erik Graversen & Jean Jacod & Mark Podolskij & Neil Shephard, 2004. "A Central Limit Theorem for Realised Power and Bipower Variations of Continuous Semimartingales," Economics Papers, Economics Group, Nuffield College, University of Oxford 2004-W29, Economics Group, Nuffield College, University of Oxford.
  10. Sílvia Gonçalves & Nour Meddahi, 2009. "Bootstrapping Realized Volatility," Econometrica, Econometric Society, Econometric Society, vol. 77(1), pages 283-306, 01.
  11. Neil Shephard & Ole E. Barndorff-Nielsen, 2003. "Impact of jumps on returns and realised variances: econometric analysis of time-deformed Levy processes," Economics Series Working Papers, University of Oxford, Department of Economics 2003-W12, University of Oxford, Department of Economics.
  12. Comte, F. & Renault, E., 1996. "Long Memory in Continuous Time Stochastic Volatility Models," Papers, Toulouse - GREMAQ 96.406, Toulouse - GREMAQ.
  13. Bandi, Federico M. & Russell, Jeffrey R., 2006. "Separating microstructure noise from volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(3), pages 655-692, March.
  14. Fleming, Jeff & Kirby, Chris & Ostdiek, Barbara, 2003. "The economic value of volatility timing using "realized" volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 67(3), pages 473-509, March.
  15. Torben G. Andersen & Tim Bollerslev & Dobrislav Dobrev, 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," NBER Working Papers 12963, National Bureau of Economic Research, Inc.
  16. Ghysels, Eric & Santa-Clara, Pedro & Valkanov, Rossen, 2006. "Predicting volatility: getting the most out of return data sampled at different frequencies," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 59-95.
  17. Torben G. Andersen & Tim Bollerslev & Nour Meddahi, 2002. "Analytic Evaluation of Volatility Forecasts," CIRANO Working Papers, CIRANO 2002s-90, CIRANO.
  18. Ole E. Barndorff-Nielsen & Neil Shephard & Matthias Winkel, 2005. "Limit theorems for multipower variation in the presence of jumps," Economics Papers, Economics Group, Nuffield College, University of Oxford 2005-W07, Economics Group, Nuffield College, University of Oxford.
  19. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, Econometric Society, vol. 71(2), pages 579-625, March.
  20. Lan Zhang & Per A. Mykland & Yacine Ait-Sahalia, 2003. "A Tale of Two Time Scales: Determining Integrated Volatility with Noisy High Frequency Data," NBER Working Papers 10111, National Bureau of Economic Research, Inc.
  21. Meddahi, Nour & Mykland, Per & Shephard, Neil, 2011. "Realized Volatility," Journal of Econometrics, Elsevier, Elsevier, vol. 160(1), pages 1-1, January.
  22. Bollerslev, Tim & Zhou, Hao, 2002. "Estimating stochastic volatility diffusion using conditional moments of integrated volatility," Journal of Econometrics, Elsevier, Elsevier, vol. 109(1), pages 33-65, July.
  23. Officer, R R, 1973. "The Variability of the Market Factor of the New York Stock Exchange," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 46(3), pages 434-53, July.
  24. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(1), pages 3-29, September.
  25. Garcia, René & Lewis, Marc-André & Pastorello, Sergio & Renault, Éric, 2011. "Estimation of objective and risk-neutral distributions based on moments of integrated volatility," Journal of Econometrics, Elsevier, Elsevier, vol. 160(1), pages 22-32, January.
  26. Hansen, Peter R. & Lunde, Asger, 2006. "Realized Variance and Market Microstructure Noise," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 24, pages 127-161, April.
  27. Todorov, Viktor, 2009. "Estimation of continuous-time stochastic volatility models with jumps using high-frequency data," Journal of Econometrics, Elsevier, Elsevier, vol. 148(2), pages 131-148, February.
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Cited by:
  1. Bakshi, Gurdip & Panayotov, George & Skoulakis, Georgios, 2011. "Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios," Journal of Financial Economics, Elsevier, Elsevier, vol. 100(3), pages 475-495, June.

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