A Discrete-Time Model for Daily S&P500 Returns and Realized Variations: Jumps and Leverage Effects

Tim Bollerslev (), Uta Kretschmer, Christian Pigorsch and George Tauchen ()
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George Tauchen: School of Economics and Management, University of Aarhus, Denmark and CREATES, Postal: 8000 Aarhus C, Denmark

CREATES Research Papers from School of Economics and Management, University of Aarhus

Abstract: We develop an empirically highly accurate discrete-time daily stochastic volatility model that explicitly distinguishes between the jump and continuoustime components of price movements using nonparametric realized variation and Bipower variation measures constructed from high-frequency intraday data. The model setup allows us to directly assess the structural inter-dependencies among the shocks to returns and the two different volatility components. The model estimates suggest that the leverage effect, or asymmetry between returns and volatility, works primarily through the continuous volatility component. The excellent fit of the model makes it an ideal candidate for an easyto- implement auxiliary model in the context of indirect estimation of empirically more realistic continuous-time jump diffusion and L´evy-driven stochastic volatility models, effectively incorporating the interdaily dependencies inherent in the high-frequency intraday data.

Keywords: Realized volatility; Bipower variation; Jumps; Leverage effect; Simultaneous equation model (search for similar items in EconPapers)
JEL-codes: C1 C3 C5 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk and nep-mst
Date: 2007-08-16
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ftp://ftp.econ.au.dk/creates/rp/07/rp07_22.pdf (application/pdf)

Related works:
Journal Article: A discrete-time model for daily S & P500 returns and realized variations: Jumps and leverage effects (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:aah:create:2007-22

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