Volatility Activity: Specification and Estimation
Duke University - Economics Group
May 13, 2011
Economic Research Initiatives at Duke (ERID) Working Paper No. 114
The paper examines volatility activity and its asymmetry and undertakes further specification analysis of volatility models based on it. We develop new nonparametric statistics using high frequency option-based VIX data to test for asymmetry in volatility jumps. We also develop methods to estimate and evaluate, using price data alone, a general encompassing model for volatility dynamics where volatility activity is unrestricted. The nonparametric application to VIX data, along with model estimation for S&P Index returns, suggests that volatility moves are best captured by infinite variation pure-jump martingale with symmetric jump distribution. The latter provides a parsimonious generalization of the jump-diffusions commonly used for volatility modeling.
Number of Pages in PDF File: 32
Keywords: Asymmetric Volatility Activity, High-Frequency Data, Laplace Transform, Signed Power Variation, Specification Testing, Stochastic Volatility, Volatility Jumps
JEL Classification: C51, C52, G12
Date posted: October 13, 2011
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