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A discrete-time model for daily S & P500 returns and realized variations: Jumps and leverage effects

  • Bollerslev, Tim
  • Kretschmer, Uta
  • Pigorsch, Christian
  • Tauchen, George

We develop an empirically highly accurate discrete-time daily stochastic volatility model that explicitly distinguishes between the jump and continuous-time components of price movements using nonparametric realized variation and Bipower variation measures constructed from high-frequency intraday data. The model setup allows us to directly assess the structural inter-dependencies among the shocks to returns and the two different volatility components. The model estimates suggest that the leverage effect, or asymmetry between returns and volatility, works primarily through the continuous volatility component. The excellent fit of the model makes it an ideal candidate for an easy-to-implement auxiliary model in the context of indirect estimation of empirically more realistic continuous-time jump diffusion and Lévy-driven stochastic volatility models, effectively incorporating the interdaily dependencies inherent in the high-frequency intraday data.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 150 (2009)
Issue (Month): 2 (June)
Pages: 151-166

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Handle: RePEc:eee:econom:v:150:y:2009:i:2:p:151-166
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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