The Relationship Between the Volatility of Returns and the Number of Jumps in Financial Markets

Álvaro Cartea () and Dimitrios Karyampas
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Dimitrios Karyampas: Department of Economics, Mathematics & Statistics, Birkbeck

No 914, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: The contribution of this paper is two-fold. First we show how to estimate the volatility of high frequency log-returns where the estimates are not affected by microstructure noise and the presence of Lévy-type jumps in prices. The second contribution focuses on the relationship between the number of jumps and the volatility of log-returns of the SPY, which is the fund that tracks the S&P 500. We employ SPY high frequency data (minute-by-minute) to obtain estimates of the volatility of the SPY log-returns to show that: (i) The number of jumps in the SPY is an important variable in explaining the daily volatility of the SPY log-returns; (ii) The number of jumps in the SPY prices has more explanatory power with respect to daily volatility than other variables based on: volume, number of trades, open and close, and other jump activity measures based on Bipower Variation; (iii) The number of jumps in the SPY prices has a similar explanatory power to that of the VIX, and slightly less explanatory power than measures based on high and low prices, when it comes to explaining volatility; (iv) Forecasts of the average number of jumps are important variables when producing monthly volatility forecasts and, furthermore, they contain information that is not impounded in the VIX.

Date: 2009-11
New Economics Papers: this item is included in nep-mst
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https://eprints.bbk.ac.uk/id/eprint/7607 First version, 2009 (application/pdf)

Related works:
Journal Article: The Relationship between the Volatility of Returns and the Number of Jumps in Financial Markets (2016)
Working Paper: The relationship between the volatility of returns and the number of jumps in financial markets (2009)
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