Roughing it Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility

Torben G. Andersen (), Tim Bollerslev () and Francis Diebold ()

No 11775, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from high-frequency returns coupled with simple modeling procedures. Building on recent theoretical results in Barndorff-Nielsen and Shephard (2004a, 2005) for related bi-power variation measures, the present paper provides a practical and robust framework for non-parametrically measuring the jump component in asset return volatility. In an application to the DM/$ exchange rate, the S&P500 market index, and the 30-year U.S. Treasury bond yield, we find that jumps are both highly prevalent and distinctly less persistent than the continuous sample path variation process. Moreover, many jumps appear directly associated with specific macroeconomic news announcements. Separating jump from non-jump movements in a simple but sophisticated volatility forecasting model, we find that almost all of the predictability in daily, weekly, and monthly return volatilities comes from the non-jump component. Our results thus set the stage for a number of interesting future econometric developments and important financial applications by separately modeling, forecasting, and pricing the continuous and jump components of the total return variation process.

JEL-codes: C1 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-fin, nep-fmk and nep-for
Date: 2005-11
Note: AP
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Related works:
Working Paper: Roughing It Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility (2007)
Journal Article: Roughing It Up: Including Jump Components in the Measurement, Modeling, and Forecasting of Return Volatility (2007)
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