Threshold Bipower Variation and the Impact of Jumps on Volatility Forecasting

32 Pages Posted: 2 Apr 2008 Last revised: 6 Jul 2009

See all articles by Fulvio Corsi

Fulvio Corsi

University of Pisa - Department of Economics; City University London

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata"

Roberto Renò

University of Verona - Department of Economics

Date Written: April 4, 2008

Abstract

This study reconsiders the role of jumps for volatility forecasting by showing that jumps have a positive and mostly significant impact on future volatility. This result becomes apparent once volatility is correctly separated into its continuous and discontinuous component. To this purpose, we introduce the concept of threshold bipower variation, which is based on the joint use of bipower variation and threshold estimation. We show that its generalization (threshold multipower variation) admits a feasible central limit theorem in the presence of jumps, which is not attainable for standard multipower variation if not in very restrictive cases. Importantly, with respect to the standard multipower variation, our estimator provides less biased estimates of the continuous quadratic variation and jumps in finite samples. It also provides a new test for jump detection which has substantially more power than previous tests. Empirical analysis (on the S&P500 index, single stocks and US bond yields) shows that the proposed techniques improve significantly the accuracy of volatility forecasts especially in periods following the occurrence of a jump.

Keywords: volatility, forecasting, jumps, HAR

Suggested Citation

Corsi, Fulvio and Pirino, Davide and Renò, Roberto, Threshold Bipower Variation and the Impact of Jumps on Volatility Forecasting (April 4, 2008). Available at SSRN: https://ssrn.com/abstract=1115783 or http://dx.doi.org/10.2139/ssrn.1115783

Fulvio Corsi

University of Pisa - Department of Economics ( email )

via Ridolfi 10
I-56100 Pisa, PI 56100
Italy

HOME PAGE: http://people.unipi.it/fulvio_corsi/

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata" ( email )

Via Columbia 2
Rome, Lazio 00133
Italy

Roberto Renò (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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