Stocks in the Short Run

65 Pages Posted: 24 Jun 2011

See all articles by Bryan Ellickson

Bryan Ellickson

University of California, Los Angeles (UCLA) - Department of Economics

Benjamin Hood

Parametric Portfolio Associates, LLC

Tin Shing Liu

University of California, Los Angeles (UCLA)

Duke Whang

University of California, Los Angeles (UCLA)

Peilan Zhou

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: June 20, 2011

Abstract

The existing literature estimates stock-price volatility accumulated over the trading day. We focus on what happens to volatility within the trading day. Using transactions data from 2001 through 2009, we estimate the path of the quadratic variation process in 5-minute increments day by day for the 30 stocks of the DJIA and for an exchange-traded fund (the SPDR) that tracks the S&P 500. Using a Heston (1993) model, we estimate that 80% of the gap between the level of the volatility process and its asymptotic mean is eliminated within 5-minutes. Roughly two-thirds of daily realized volatility can be explained by a deterministic version of the Heston model that begins the trading day far above its equilibrium and converges to a constant. The remaining third reflects stochastic shocks to volatility arriving after trade begins. The asymptotic mean of the SPDR behaves much like the closing value of the VIX, a volatility index based on the S&P 500 stock index. When standardized by our 5-minute volatility estimates, 5-minute log returns are approximately normally distributed.

Keywords: discrete observation, intraday volatility estimation, quadratic variation, realized volatility, Heston, DJIA, SPDR, VIX

JEL Classification: G12, C58

Suggested Citation

Ellickson, Bryan and Hood, Benjamin and Liu, Tin Shing and Whang, Duke and Zhou, Peilan, Stocks in the Short Run (June 20, 2011). Available at SSRN: https://ssrn.com/abstract=1868544 or http://dx.doi.org/10.2139/ssrn.1868544

Bryan Ellickson (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
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Benjamin Hood

Parametric Portfolio Associates, LLC ( email )

7310 Columbia Center
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Seattle, WA 98104
United States

Tin Shing Liu

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Duke Whang

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Peilan Zhou

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

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