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Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns

Author

Listed:
  • Andersen, Torben G.
  • Bollerslev, Tim
  • Frederiksen, Per
  • Orregaard Nielsen, Morten

Abstract

We provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous-time jump diffusion models traditionally used in asset pricing finance. Our approach builds directly on recently developed realized variation measures and non-parametric jump detection statistics constructed from high-frequency intraday data. A sequence of simple-to-implement moment-based tests involving various transformations of the daily returns speak directly to the importance of different distributional features, and may serve as useful diagnostic tools in the specifcation of empirically more realistic continuous-time asset pricing models. On applying the tests to the thirty individual stocks in the Dow Jones Industrial Average index, we find that it is important to allow for both time-varying diffusive volatility, jumps, and leverage effects to satisfactorily describe the daily stock price dynamics.

Suggested Citation

  • Andersen, Torben G. & Bollerslev, Tim & Frederiksen, Per & Orregaard Nielsen, Morten, 2008. "Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns," Queen's Economics Department Working Papers 273649, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273649
    DOI: 10.22004/ag.econ.273649
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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets

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