Volatility Activity: Specification and Estimation

Abstract:     
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

Accepted Paper Series