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A Discrete-Time Model for Daily S&P500 Returns and Realized Variations: Jumps and Leverage Effects

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

    ()

    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

We develop an empirically highly accurate discrete-time daily stochastic volatility model that explicitly distinguishes between the jump and continuoustime 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 easyto- implement auxiliary model in the context of indirect estimation of empirically more realistic continuous-time jump diffusion and L´evy-driven stochastic volatility models, effectively incorporating the interdaily dependencies inherent in the high-frequency intraday data.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2007-22.

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Length: 47
Date of creation: 16 Aug 2007
Date of revision:
Handle: RePEc:aah:create:2007-22
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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