Continuous-time models, realized volatilities, and testable distributional implications for daily stock returns

Torben Andersen, Tim Bollerslev, Per Frederiksen and Morten Nielsen
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Per Frederiksen: Equity Trading and Derivatives, Nordea Markets, Copenhagen, Denmark, Postal: Equity Trading and Derivatives, Nordea Markets, Copenhagen, Denmark

Journal of Applied Econometrics, 2010, vol. 25, issue 2, 233-261

Abstract: 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 intra-day 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 30 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. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2010
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Citations: View citations in EconPapers (107)

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Related works:
Working Paper: Continuous-time Models, Realized Volatilities, And Testable Distributional Implications For Daily Stock Returns (2008)
Working Paper: Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns (2007)
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DOI: 10.1002/jae.1105

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