Conditional jumps in volatility and their economic determinants
The volatility of financial returns is affected by rapid and large increments. Such movements can be hardly generated by a pure diffusive process for stochastic volatility. On the contrary jumps in volatility are important because they allow for rapid increases, like those observed during stock market crashes. We propose an extension of HAR model for estimating the presence of jumps in volatility, using the realized-range measure as a volatility proxy. By focusing on a set of 36 NYSE stocks, we show that, once that squared jumps in prices are disentangled from integrated variance, then there is a positive probability of jumps in volatility, conditional on the past information set. We then focus on the contribution of jumps during periods of financial turmoil. We analyze the dependence between the first principal component of the volatility jumps with a set of financial covariates including VIX, S&P500 volume, CDS, and Federal Fund rates. We observe that CDS captures large part of the expected jumps moves, verifying the common interpretation that large and sudden increases in volatility in stock markets over some days in the recent financial crisis have been caused by credit deterioration of US bank sector. Finally, we extend the model incorporating the credit-default swap in the dynamics of the jump size and intensity. The estimates confirm the significant contribution of the credit-default swap to the dynamics of the volatility jump size.
|Date of creation:||Sep 2011|
|Date of revision:|
|Contact details of provider:|| Postal: via del Santo, 33 - 35122 Padova|
Phone: +39 +49 8274210
Fax: +39 +49 827.4211
Web page: http://www.decon.unipd.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2013.
"Modeling and predicting the CBOE market volatility index,"
Textos para discussão
342, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
- Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2014. "Modeling and predicting the CBOE market volatility index," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 1-10.
- Marcelo Fernandes & Marcelo Cunha Medeiros & MArcelo Scharth, 2007. "Modeling and predicting the CBOE market volatility index," Textos para discussão 548, Department of Economics PUC-Rio (Brazil).
- Benjamin Y. Zhang & Hao Zhou & Haibin Zhu, 2005.
"Explaining credit default swap spreads with the equity volatility and jump risks of individual firms,"
Finance and Economics Discussion Series
2005-63, Board of Governors of the Federal Reserve System (U.S.).
- Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2009. "Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5099-5131, December.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001.
"Modeling and Forecasting Realized Volatility,"
Center for Financial Institutions Working Papers
01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Labys, Paul, 2002. "Modeling and Forecasting Realized Volatility," Working Papers 02-12, Duke University, Department of Economics.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," NBER Working Papers 8160, National Bureau of Economic Research, Inc.
- John M. Maheu & Thomas H. McCurdy, 2003.
"News Arrival, Jump Dynamics and Volatility Components for Individual Stock Returns,"
CIRANO Working Papers
- John M. Maheu & Thomas H. McCurdy, 2004. "News Arrival, Jump Dynamics, and Volatility Components for Individual Stock Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 755-793, 04.
- Chernov, Mikhail & Ronald Gallant, A. & Ghysels, Eric & Tauchen, George, 2003.
"Alternative models for stock price dynamics,"
Journal of Econometrics,
Elsevier, vol. 116(1-2), pages 225-257.
- Mikhail Chernov & A. Ronald Gallant & Eric Ghysels & George Tauchen, 2002. "Alternative Models for Stock Price Dynamics," CIRANO Working Papers 2002s-58, CIRANO.
- Chernov, Mikhail & Gallant, A. Ronald & Ghysels, Eric & Tauchen, George, 2002. "Alternative Models for Stock Price Dynamic," Working Papers 02-03, Duke University, Department of Economics.
- Todorov, Viktor, 2011. "Econometric analysis of jump-driven stochastic volatility models," Journal of Econometrics, Elsevier, vol. 160(1), pages 12-21, January.
- Rangel, José Gonzalo, 2011.
"Macroeconomic news, announcements, and stock market jump intensity dynamics,"
Journal of Banking & Finance,
Elsevier, vol. 35(5), pages 1263-1276, May.
- José Gonzalo Rangel, 2009. "Macroeconomic News, Announcements, and Stock Market Jump Intensity Dynamics," Working Papers 2009-15, Banco de México.
- S. Bordignon & D. Raggi, 2010.
"Long memory and nonlinearities in realized volatility: a Markov switching approach,"
694, Dipartimento Scienze Economiche, Universita' di Bologna.
- Raggi, Davide & Bordignon, Silvano, 2012. "Long memory and nonlinearities in realized volatility: A Markov switching approach," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3730-3742.
- Todorov, Viktor, 2009. "Estimation of continuous-time stochastic volatility models with jumps using high-frequency data," Journal of Econometrics, Elsevier, vol. 148(2), pages 131-148, February.
- Christensen, Kim & Podolskij, Mark, 2007. "Realized range-based estimation of integrated variance," Journal of Econometrics, Elsevier, vol. 141(2), pages 323-349, December.
- Chan, Wing H & Maheu, John M, 2002. "Conditional Jump Dynamics in Stock Market Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 377-89, July.
- Christensen, Kim & Podolskij, Mark & Vetter, Mathias, 2006.
"Bias-Correcting the Realized Range-Based Variance in the Presence of Market Microstructure Noise,"
2006,52, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
- Kim Christensen & Mark Podolskij & Mathias Vetter, 2009. "Bias-correcting the realized range-based variance in the presence of market microstructure noise," Finance and Stochastics, Springer, vol. 13(2), pages 239-268, April.
- Martens, Martin & van Dijk, Dick, 2007.
"Measuring volatility with the realized range,"
Journal of Econometrics,
Elsevier, vol. 138(1), pages 181-207, May.
- Bjørn Eraker, 2004. "Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1367-1404, 06.
- Muller, Ulrich A. & Dacorogna, Michel M. & Dave, Rakhal D. & Olsen, Richard B. & Pictet, Olivier V. & von Weizsacker, Jacob E., 1997. "Volatilities of different time resolutions -- Analyzing the dynamics of market components," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 213-239, June.
- Viktor Todorov & George Tauchen, 2011.
Journal of Business & Economic Statistics,
Taylor & Francis Journals, vol. 29(3), pages 356-371, July.
- Fulvio Corsi, 2009. "A Simple Approximate Long-Memory Model of Realized Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(2), pages 174-196, Spring.
- McAleer, Michael & Medeiros, Marcelo C., 2008.
"A multiple regime smooth transition Heterogeneous Autoregressive model for long memory and asymmetries,"
Journal of Econometrics,
Elsevier, vol. 147(1), pages 104-119, November.
- Michael McAller & Marcelo C. Medeiros, 2007. "A multiple regime smooth transition heterogeneous autoregressive model for long memory and asymmetries," Textos para discussão 544, Department of Economics PUC-Rio (Brazil).
- Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
- Mark Broadie & Mikhail Chernov & Michael Johannes, 2007. "Model Specification and Risk Premia: Evidence from Futures Options," Journal of Finance, American Finance Association, vol. 62(3), pages 1453-1490, 06.
- Martens, Martin & van Dijk, Dick & de Pooter, Michiel, 2009. "Forecasting S&P 500 volatility: Long memory, level shifts, leverage effects, day-of-the-week seasonality, and macroeconomic announcements," International Journal of Forecasting, Elsevier, vol. 25(2), pages 282-303.
When requesting a correction, please mention this item's handle: RePEc:pad:wpaper:0138. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Raffaele Dei Campielisi)
If references are entirely missing, you can add them using this form.