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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

  • Andersen, Torben G.
  • Bollerslev, Tim
  • Dobrev, Dobrislav

We develop a sequential procedure to test the adequacy of jump-diffusion models for return distributions. We rely on intraday data and nonparametric volatility measures, along with a new jump detection technique and appropriate conditional moment tests, for assessing the import of jumps and leverage effects. A novel robust-to-jumps approach is utilized to alleviate microstructure frictions for realized volatility estimation. Size and power of the procedure are explored through Monte Carlo methods. Our empirical findings support the jump-diffusive representation for S&P500 futures returns but reveal it is critical to account for leverage effects and jumps to maintain the underlying semi-martingale assumption.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 138 (2007)
Issue (Month): 1 (May)
Pages: 125-180

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Handle: RePEc:eee:econom:v:138:y:2007:i:1:p:125-180
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