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The Implied-realized Volatility Relation With Jumps In Underlying Asset Prices

Author

Listed:
  • Bent Jesper Christensen

    (University of Aarhus and CREATES)

  • Morten Ø. Nielsen

    () (Queen's University and CREATES)

Abstract

Recent developments allow a nonparametric separation of the continuous sample path component and the jump component of realized volatility. The jump component has very different time series properties than the continuous component, and accounting for this allows improved forecasting of future realized volatility. We investigate the potential forecasting role of implied volatility backed out from option prices in the presence of these new separate realized volatility components. We show that implied volatility has incremental information relative to both the continuous and jump components of realized volatility when forecasting subsequently realized return volatility, and it appears to be an unbiased forecast. Furthermore, implied volatility has predictive power for future values of each component of realized volatility separately, showing in particular that even the jump component of realized volatility is, to some extent, predictable.

Suggested Citation

  • Bent Jesper Christensen & Morten Ø. Nielsen, 2005. "The Implied-realized Volatility Relation With Jumps In Underlying Asset Prices," Working Paper 1186, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1186
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1186.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Busch, Thomas & Christensen, Bent Jesper & Nielsen, Morten Ørregaard, 2011. "The role of implied volatility in forecasting future realized volatility and jumps in foreign exchange, stock, and bond markets," Journal of Econometrics, Elsevier, vol. 160(1), pages 48-57, January.
    2. Bent Jesper Christensen & Morten Ø. Nielsen & Thomas Busch, 2006. "The Information Content Of Treasury Bond Options Concerning Future Volatility And Price Jumps," Working Paper 1188, Economics Department, Queen's University.
    3. Wing Hong Chan & Ranjini Jha & Madhu Kalimipalli, 2009. "The Economic Value Of Using Realized Volatility In Forecasting Future Implied Volatility," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(3), pages 231-259, September.
    4. Wilkens, Sascha & Roder, Klaus, 2006. "The informational content of option-implied distributions: Evidence from the Eurex index and interest rate futures options market," Global Finance Journal, Elsevier, vol. 17(1), pages 50-74, September.
    5. Bent Jesper Christensen & Morten Ø. Nielsen & Thomas Busch, 2005. "Forecasting Exchange Rate Volatility In The Presence Of Jumps," Working Paper 1187, Economics Department, Queen's University.

    More about this item

    Keywords

    Bipower variation; implied volatility; instrumental variables; jumps; options; realized volatility; stock prices; vector autoregressive model; volatility forecasting;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G1 - Financial Economics - - General Financial Markets

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