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Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns

Torben Andersen (), Tim Bollerslev (), Per Houmann Frederiksen and Morten Nielsen ()

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We provide an empirical framework for assessing the distributional properties of daily specu- lative returns within the context of the continuous-time modeling paradigm 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 relatively simple-to-implement moment-based tests involving various transforms of the daily returns speak directly to the import of different features of the under- lying continuous-time processes that might have generated the data. As such, the tests may serve as a useful diagnostic tool in the specification of empirically more realistic asset pricing models. Our results are also directly related to the popular mixture-of-distributions hypoth- esis and the role of the corresponding latent information arrival process. On applying our sequential test procedure to the thirty individual stocks in the Dow Jones Industrial Average index, the data suggest that it is important to allow for both time-varying diffusive volatility, jumps, and leverage effects in order to satisfactorily describe the daily stock price dynamics. At a broader level, the empirical results also illustrate how the realized variation measures and high-frequency sampling schemes may be used in eliciting important distributional features and asset pricing implications more generally.

Keywords: Return distributions; continuous-time models; mixture-of-distributions hypothesis; financial-time sampling; high-frequency data; volatility signature plots; realized volatilities; jumps; leverage and volatility feedback effects (search for similar items in EconPapers)
JEL-codes: C1 G1 (search for similar items in EconPapers)
Pages: 72
Date: 2007-08-16
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19) Track citations by RSS feed

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Related works:
Journal Article: Continuous-time models, realized volatilities, and testable distributional implications for daily stock returns (2010) Downloads
Working Paper: Continuous-time Models, Realized Volatilities, And Testable Distributional Implications For Daily Stock Returns (2008) Downloads
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