Realized Laplace Transforms for Estimation of Jump Diffusive Volatility Models

39 Pages Posted: 6 Oct 2010

Date Written: September 12, 2010

Abstract

We develop a new efficient and analytically tractable method for estimation of parametric volatility models that is robust to price-level jumps and generally has good finite sample properties. The method entails first integrating intra-day data into the Realized Laplace Transform of volatility, which is a model-free and jump-robust estimate of daily integrated empirical Laplace transform of the unobservable volatility. The estimation then is done by matching moments of the integrated joint Laplace transform with those implied by various parametric volatility models. In the empirical application, the best fitting volatility model is a non-diffusive two-factor model where low activity jumps drive its persistent component and more active jumps drive the transient one.

Keywords: Jumps, High-Frequency Data, Laplace Transform, Stochastic Volatility

JEL Classification: C51, C52, G12

Suggested Citation

Todorov, Viktor and Tauchen, George E. and Grynkiv, Iaryna, Realized Laplace Transforms for Estimation of Jump Diffusive Volatility Models (September 12, 2010). Economic Research Initiatives at Duke (ERID) Working Paper No. 75, Available at SSRN: https://ssrn.com/abstract=1687998 or http://dx.doi.org/10.2139/ssrn.1687998

Viktor Todorov (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

George E. Tauchen

Duke University - Economics Group ( email )

Box 90097
221 Social Sciences
Durham, NC 27708-0097
United States
919-660-1812 (Phone)
919-684-8974 (Fax)

Iaryna Grynkiv

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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