The Economic Value of Volatility Timing with Realized Jumps

49 Pages Posted: 12 Mar 2014 Last revised: 21 Aug 2015

See all articles by Ingmar Nolte

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Qi Xu

Zhejiang University - School of Economics and Academy of Financial Research

Date Written: January 29, 2015

Abstract

This paper comprehensively investigates the role of realized jumps detected from high frequency data in predicting future volatility from both statistical and economic perspectives. Using seven major jump tests, we show that separating jumps from diffusion improves volatility forecasting both in-sample and out-of-sample. Moreover, we show that these statistical improvements can be translated into economic value. We find a risk-averse investor can significantly improve her portfolio performance by incorporating realized jumps into a volatility timing based portfolio strategy. Our results hold true across the majority of jump tests, and are robust to controlling for microstructure effects and transaction costs.

Keywords: high frequency data, jumps, asset allocation, volatility forecasting, realized volatility

JEL Classification: C58,C53,G11

Suggested Citation

Nolte, Ingmar and Xu, Qi, The Economic Value of Volatility Timing with Realized Jumps (January 29, 2015). Available at SSRN: https://ssrn.com/abstract=2406934 or http://dx.doi.org/10.2139/ssrn.2406934

Ingmar Nolte

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Qi Xu (Contact Author)

Zhejiang University - School of Economics and Academy of Financial Research

Yuquan Campus 38 Zheda Road
Hangzhou, Zhejiang 310027
China

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