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

  • Torben G. Andersen

    ()

    (Northwestern University, NBER, and CREATES)

  • Tim Bollerslev

    ()

    (Duke University, NBER, and CREATES)

  • Per Frederiksen

    ()

    (Nordea Markets)

  • Morten Ørregaard Nielsen

    ()

    (Queen's University and CREATES)

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 specification 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.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1173.pdf
File Function: First version 2008
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1173.

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Length: 69 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:qed:wpaper:1173
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