The Relationship between the Volatility of Returns and the Number of Jumps in Financial Markets

Econometric Reviews, Vol. 35 , Iss. 6,2016

25 Pages Posted: 18 Nov 2009 Last revised: 30 Aug 2017

See all articles by Álvaro Cartea

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Dimitris Karyampas

Bocconi University

Date Written: May 7, 2014

Abstract

We propose a methodology to employ high frequency financial data to obtain estimates of volatility of log-prices which are not affected by microstructure noise and Lévy jumps. We introduce the 'number of jumps' as a variable to explain and predict volatility and show that the number of jumps in SPY prices is an important variable to explain the daily volatility of the SPY log-returns, has more explanatory power than other variables (e.g. high and low, open and close), and has a similar explanatory power to that of the VIX. Finally, number of jumps is very useful to forecast volatility and contains information that is not impounded in the VIX.

Keywords: volatility forecasts, high-frequency data, implied volatility, VIX, jumps, microstructure noise

JEL Classification: C53, G12, G14, C22

Suggested Citation

Cartea, Álvaro and Karyampas, Dimitris, The Relationship between the Volatility of Returns and the Number of Jumps in Financial Markets (May 7, 2014). Econometric Reviews, Vol. 35 , Iss. 6,2016. Available at SSRN: https://ssrn.com/abstract=1507673 or http://dx.doi.org/10.2139/ssrn.1507673

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Dimitris Karyampas

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
597
Abstract Views
2,566
rank
47,845
PlumX Metrics