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An Empirical Investigation of Continuous-Time Equity Return Models

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Torben G. Andersen
Luca Benzoni
Jesper Lund

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Abstract

This paper extends the class of stochastic volatility diffusions for asset returns to encompass Poisson jumps of time-varying intensity. We find that any reasonably descriptive continuous-time model for equity-index returns must allow for discrete jumps as well as stochastic volatility with a pronounced negative relationship between return and volatility innovations. We also find that the dominant empirical characteristics of the return process appear to be priced by the option market. Our analysis indicates a general correspondence between the evidence extracted from daily equity-index returns and the stylized features of the corresponding options market prices.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8510.

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Date of creation: Oct 2001
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Handle: RePEc:nbr:nberwo:8510

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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