Using Daily Range Data to Calibrate Volatility Diffusions and Extract the Forward Integrated Variance

Duke Economics Working Paper No. 00-04

36 Pages Posted: 6 Nov 2000

See all articles by A. Ronald Gallant

A. Ronald Gallant

Duke University - Fuqua School of Business, Economics Group; New York University - Department of Economics

Chien-Te Hsu

Credit Suisse Asset Management

George Tauchen

Duke University - Economics Group

Abstract

A common model for security price dynamics is the continuous time stochastic volatility model. For this model, Hull and White (1987) show that the price of a derivative claim is the conditional expectation of the Black-Scholes price with the forward integrated variance replacing the Black-Scholes variance. Implementing the Hull and White characterization requires both estimates of the price dynamics and the conditional distribution of the forward integrated variance given observed variables. Using daily data on close-to-close price movement and the daily range, we find that standard models do not fit the data very well and a more general three factor model does better, as it mimics the long-memory feature of financial volatility. We develop techniques for estimating the conditional distribution of the forward integrated variance given observed variables.

JEL Classification: G13

Suggested Citation

Gallant, A. Ronald and Hsu, Chien-Te and Tauchen, George E., Using Daily Range Data to Calibrate Volatility Diffusions and Extract the Forward Integrated Variance. Duke Economics Working Paper No. 00-04. Available at SSRN: https://ssrn.com/abstract=235742 or http://dx.doi.org/10.2139/ssrn.235742

A. Ronald Gallant

Duke University - Fuqua School of Business, Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

New York University - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

Chien-Te Hsu

Credit Suisse Asset Management

One Madison Ave
New York, NY 10010
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)

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