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Threshold Bipower Variation and the Impact of Jumps on Volatility Forecasting

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  • Fulvio Corsi
  • Davide Pirino
  • Roberto Reno'

Abstract

This study reconsiders the role of jumps for volatility forecasting by showing that jumps have a positive and mostly significant impact on future volatility. This result becomes apparent once volatility is separated into its continuous and discontinuous component using estimators which are not only consistent, but also scarcely plagued by small-sample bias. To this purpose, we introduce the concept of threshold bipower variation, which is based on the joint use of bipower variation and threshold estimation. We show that its generalization (threshold multipower vari- ation) admits a feasible central limit theorem in the presence of jumps and provides less biased estimates, with respect to the standard multipower variation, of the continuous quadratic varia- tion in finite samples. We further provide a new test for jump detection which has substantially more power than tests based on multipower variation. Empirical analysis (on the S&P500 index, individual stocks and US bond yields) shows that the proposed techniques improve significantly the accuracy of volatility forecasts especially in periods following the occurrence of a jump.

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Bibliographic Info

Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2010/11.

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Date of creation: 06 Jul 2010
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Handle: RePEc:ssa:lemwps:2010/11

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Keywords: volatility estimation; jump detection; volatility forecasting; threshold estimation; financial markets;

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Citations

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Cited by:
  1. Fengler, Matthias & Okhrin, Ostap, 2012. "Realized Copula," Economics Working Paper Series 1214, University of St. Gallen, School of Economics and Political Science.
  2. Philippe Mueller & Andrea Vedolin & Yu-min Yen, 2012. "Bond Variance Risk Premia," FMG Discussion Papers dp699, Financial Markets Group.
  3. Audrino, Francesco & Hu, Yujia, 2011. "Volatility Forecasting: Downside Risk, Jumps and Leverage Effect," Economics Working Paper Series 1138, University of St. Gallen, School of Economics and Political Science.
  4. Almut Veraart, 2011. "How precise is the finite sample approximation of the asymptotic distribution of realised variation measures in the presence of jumps?," AStA Advances in Statistical Analysis, Springer, vol. 95(3), pages 253-291, September.
  5. Tim Bollerslev & Lai Xu & Hao Zhou, 2012. "Stock Return and Cash Flow Predictability: The Role of Volatility Risk," CREATES Research Papers 2012-51, School of Economics and Management, University of Aarhus.
  6. Cecilia Mancini & Vanessa Mattiussi & Roberto Reno', 2012. "Spot Volatility Estimation Using Delta Sequences," DiMaD Working Papers 2012-10, Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze.
  7. Maria Elvira Mancino & Simona Sanfelici, 2011. "Estimation of Quarticity with High Frequency Data," DiMaD Working Papers 2011-06, Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze, revised Jan 2012.
  8. Giacomo Bormetti & Lucio Maria Calcagnile & Michele Treccani & Fulvio Corsi & Stefano Marmi & Fabrizio Lillo, 2013. "Modelling systemic price cojumps with Hawkes factor models," Papers 1301.6141, arXiv.org, revised Mar 2013.

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