Volatility Activity: Specification and Estimation

32 Pages Posted: 13 Oct 2011  

Viktor Todorov

Northwestern University

George Tauchen

Duke University - Economics Group

Iaryna Grynkiv

Duke University

Date Written: May 13, 2011

Abstract

The paper examines volatility activity and its asymmetry and undertakes further specification analysis of volatility models based on it. We develop new nonparametric statistics using high frequency option-based VIX data to test for asymmetry in volatility jumps. We also develop methods to estimate and evaluate, using price data alone, a general encompassing model for volatility dynamics where volatility activity is unrestricted. The nonparametric application to VIX data, along with model estimation for S&P Index returns, suggests that volatility moves are best captured by infinite variation pure-jump martingale with symmetric jump distribution. The latter provides a parsimonious generalization of the jump-diffusions commonly used for volatility modeling.

Keywords: Asymmetric Volatility Activity, High-Frequency Data, Laplace Transform, Signed Power Variation, Specification Testing, Stochastic Volatility, Volatility Jumps

JEL Classification: C51, C52, G12

Suggested Citation

Todorov, Viktor and Tauchen, George and Grynkiv, Iaryna, Volatility Activity: Specification and Estimation (May 13, 2011). Economic Research Initiatives at Duke (ERID) Working Paper No. 114. Available at SSRN: https://ssrn.com/abstract=1943093

Viktor Todorov

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

George E. Tauchen (Contact Author)

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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