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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

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 Levy-driven stochastic volatility models, effectively incorporating the interdaily dependencies inherent in the high-frequency intraday data.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-06.

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Length: 49
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-06
Contact details of provider: Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

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