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http://ssrn.com/abstract=1150061
 
 

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


Torben G. Andersen


Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); University of Aarhus - CREATES

Tim Bollerslev


Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Francis X. Diebold


University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

August 16, 2007

CREATES Research Paper No. 2007-18

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&P 500 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.

Number of Pages in PDF File: 50

Keywords: Continuous-time methods, jumps, quadratic variation, realized volatility, bi-power variation, highfrequency data, volatility forecasting, macroeconomic news, HAR-RV model, HAR-RV-CJ model

JEL Classification: C1, G1

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Date posted: June 23, 2008  

Suggested Citation

Andersen, Torben G. and Bollerslev, Tim and Diebold, Francis X., Roughing it Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility (August 16, 2007). CREATES Research Paper No. 2007-18. Available at SSRN: http://ssrn.com/abstract=1150061 or http://dx.doi.org/10.2139/ssrn.1150061

Contact Information

Torben G. Andersen (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
University of Aarhus - CREATES ( email )
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark
Tim Bollerslev
Duke University - Finance ( email )
Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)
Duke University - Department of Economics
Durham, NC 27708-0204
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Francis X. Diebold
University of Pennsylvania - Department of Economics ( email )
3718 Locust Walk
Philadelphia, PA 19104
United States
215-898-1507 (Phone)
215-573-4217 (Fax)
HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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