Volatility jumps and their economic determinants

Massimiliano Caporin, Eduardo Rossi and Paolo Santucci de Magistris ()
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Paolo Santucci de Magistris: Aarhus University and CREATES, Postal: Department of Economics and Business, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

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

Abstract: The volatility of financial returns is characterized by rapid and large increments. We propose an extension of the Heterogeneous Autoregressive model to incorporate jumps into the dynamics of the ex-post volatility measures. Using the realized-range measures of 36 NYSE stocks, we show that there is a positive probability of jumps in volatility. A common factor in the volatility jumps is shown to be related to a set of financial covariates (such as variance risk premium, S&P500 volume, credit-default swap, and federal fund rates). The credit-default swap on US banks and variance risk premium have predictive power on expected jump moves, thus confirming the common interpretation that sudden and large increases in equity volatility can be anticipated by credit deterioration of the US bank sector as well as changes in the market expectations of future risks. Finally, the model is extended to incorporate the credit-default swap and the variance risk premium in the dynamics of the jump size and intensity.

Keywords: Volatility jumps; Realized range; HAR-V-J; CDS (search for similar items in EconPapers)
JEL-codes: C22 C58 G01 (search for similar items in EconPapers)
Pages: 45
Date: 2014-08-20
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (15)

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Journal Article: Volatility Jumps and Their Economic Determinants (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2014-27

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