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The contribution of jumps to forecasting the density of returns

Listed author(s):
  • Christophe Chorro

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Florian Ielpo

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Unigestion SA - UNIGESTION , IPAG Business School)

  • Benoît Sévi

    ()

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - UN - Université de Nantes)

The extraction of the jump component in dynamics of asset prices haw witnessed a considerably growing body of literature. Of particular interest is the decomposition of returns' quadratic variation between their continuous and jump components. Recent contributions highlight the importance of this component in forecasting volatility at different horizons. In this article, we extend a methodology developed in Maheu and McCurdy (2011) to exploit the information content of intraday data in forecasting the density of returns at horizons up to sixty days. We follow Boudt et al. (2011) to detect intraday returns that should be considered as jumps. The methodology is robust to intra-week periodicity and further delivers estimates of signed jumps in contrast to the rest of the literature where only the squared jump component can be estimated. Then, we estimate a bivariate model of returns and volatilities where the jump component is independently modeled using a jump distribution that fits the stylized facts of the estimated jumps. Our empirical results for S&P 500 futures, U.S. 10-year Treasury futures, USD/CAD exchange rate and WTI crude oil futures highlight the importance of considering the continuous/jump decomposition for density forecasting while this is not the case for volatility point forecast. In particular, we show that the model considering jumps apart from the continuous component consistenly deliver better density forecasts for forecasting horizons ranging from 1 to 30 days.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-01442618.

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Date of creation: Jan 2017
Publication status: Published in Documents de travail du Centre d'Economie de la Sorbonne 2017.06 - ISSN : 1955-611X. 2017
Handle: RePEc:hal:cesptp:halshs-01442618
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01442618
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