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http://ssrn.com/abstract=686021
 
 

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The Implied-Realized Volatility Relation with Jumps in Underlying Asset Prices


Bent Jesper Christensen


University of Aarhus - Department of Economics; University of Aarhus - CREATES; University of Aarhus - School of Economics and Management

Morten Ørregaard Nielsen


Queen's University - Department of Economics

2 February 2005

AFA 2006 Boston Meetings Paper

Abstract:     
Recent developments allow a nonparametric separation of the continuous sample path component and the jump component of realized volatility. We add implied volatility from option prices to this analysis. We show that implied volatility has incremental information relative to both the continuous and jump components of realized volatility, subsuming the information content of both in most of our specifications, when forecasting subsequently realized return volatility. Furthermore, implied volatility has predictive power for future values of both components of realized volatility, consistent with the notions that option markets aggregate information efficiently, and that even the jump component of realized volatility is, to some extent, predictable.

Number of Pages in PDF File: 50

Keywords: Bipower variation, implied volatility, instrumental variables, jumps, options, realized volatility, stock prices, vector autoregressive model, volatility forecasting

JEL Classification: C1, C32, G1

working papers series


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Date posted: March 23, 2005  

Suggested Citation

Christensen, Bent Jesper and Nielsen, Morten Ørregaard, The Implied-Realized Volatility Relation with Jumps in Underlying Asset Prices (2 February 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=686021 or http://dx.doi.org/10.2139/ssrn.686021

Contact Information

Bent Jesper Christensen
University of Aarhus - Department of Economics ( email )
University Park
DK-8000 Aarhus C
Denmark
+45 8942 1547 (Phone)
University of Aarhus - CREATES ( email )
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark
University of Aarhus - School of Economics and Management ( email )
Building 350
DK-8000 Aarhus C
Denmark
Morten Ørregaard Nielsen (Contact Author)
Queen's University (Canada) - Department of Economics ( email )
99 University Avenue
Kingston K7L 3N6, Ontario
Canada
HOME PAGE: http://www.econ.queensu.ca/faculty/nielsen/
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