Impact of Time-Inhomogeneous Jumps and Leverage Type Effects on Returns and Realised Variances

Abstract:     
This paper studies the effect of time - inhomogeneous jumps and leverage type effects on realised variance calculations when the logarithmic asset price is given by a Levy-driven stochastic volatility model. In such a model, the realised variance is an inconsistent estimator of the integrated variance. Nevertheless it can be used within a quasi-maximum likelihood setup to draw inference on the model parameters. In order to do that, this paper introduces a new methodology for deriving all cumulants of the returns and realised variance in explicit form by solving a recursive system of inhomogeneous ordinary differential equations.

Number of Pages in PDF File: 43

working papers series