Abstract

http://ssrn.com/abstract=686021
 
 

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


Bent Jesper Christensen


Aarhus University; Aarhus University; Aarhus University

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


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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
Aarhus University ( email )
Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark
Aarhus University ( email )
Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark
Aarhus University ( email )
Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark
Morten Orregaard Nielsen (Contact Author)
Queen's University - Department of Economics ( email )
94 University Avenue
Kingston K7L 3N6, Ontario
Canada
HOME PAGE: http://www.econ.queensu.ca/faculty/nielsen/
Feedback to SSRN


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