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The relationship between the volatility of returns and the number of jumps in financial markets

  • Alvaro Cartea

    ()

  • Dimitrios Karyampas

    ()

The contribution of this paper is two-fold. First we show how to estimate the volatility of high frequency log-returns where the estimates are not a affected by microstructure noise and the presence of Lévy-type jumps in prices. The second contribution focuses on the relationship between the number of jumps and the volatility of log-returns of the SPY, which is the fund that tracks the S&P 500. We employ SPY high frequency data (minute-by-minute) to obtain estimates of the volatility of the SPY log-returns to show that: (i) The number of jumps in the SPY is an important variable in explaining the daily volatility of the SPY log-returns; (ii) The number of jumps in the SPY prices has more explanatory power with respect to daily volatility than other variables based on: volume, number of trades, open and close, and other jump activity measures based on Bipower Variation; (iii) The number of jumps in the SPY prices has a similar explanatory power to that of the VIX, and slightly less explanatory power than measures based on high and low prices, when it comes to explaining volatility; (iv) Forecasts of the average number of jumps are important variables when producing monthly volatility forecasts and, furthermore, they contain information that is not impounded in the VIX.

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Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb097508.

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Date of creation: Dec 2009
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Handle: RePEc:cte:wbrepe:wb097508
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  1. Ole E. Barndorff-Nielsen & Neil Shephard, 2003. "Econometrics of testing for jumps in financial economics using bipower variation," Economics Papers 2003-W21, Economics Group, Nuffield College, University of Oxford.
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  24. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
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