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The Analysis of Stochastic Volatility in the Presence of Daily Realized Measures

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  • Siem Jan Koopman
  • Marcel Scharth

Abstract

We develop a systematic framework for the joint modeling of returns and multiple daily realized measures. We assume a linear state space representation for the log realized measures, which are noisy and biased estimates of the log daily integrated variance, at least due to Jensen's inequality. We incorporate filtering methods for the estimation of the latent log-volatility process. The dependence between daily returns and realized measurement errors leads us to develop a two-step estimation method for all parameters in our model specification. The estimation method is computationally straightforward even when the stochastic volatility model has non-Gaussian return innovations and leverage effects. Our extensive empirical study for nine Dow Jones stock return series reveals that measurement errors become significantly smaller after filtering and that the forecasts from our model outperforms those from a set of recently developed alternatives. Copyright The Author, 2012. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Siem Jan Koopman & Marcel Scharth, 2012. "The Analysis of Stochastic Volatility in the Presence of Daily Realized Measures," Journal of Financial Econometrics, Oxford University Press, vol. 11(1), pages 76-115, December.
    • Handle: RePEc:oup:jfinec:v:11:y:2012:i:1:p:76-115
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbs016
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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