Continuous-time models, realized volatilities, and testable distributional implications for daily stock returns

Torben G. Andersen, Tim Bollerslev, Per Frederiksen, Morten Ørregaard Nielsen

Research output: Contribution to journalArticlepeer-review

88 Scopus citations

Abstract

We provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous-time jump diffusion models traditionally used in asset pricing finance. Our approach builds directly on recently developed realized variation measures and non-parametric jump detection statistics constructed from high-frequency intra-day data. A sequence of simple-to-implement moment-based tests involving various transformations of the daily returns speak directly to the importance of different distributional features, and may serve as useful diagnostic tools in the specification of empirically more realistic continuous-time asset pricing models. On applying the tests to the 30 individual stocks in the Dow Jones Industrial Average index, we find that it is important to allow for both time-varying diffusive volatility, jumps, and leverage effects to satisfactorily describe the daily stock price dynamics.

Original languageEnglish (US)
Pages (from-to)233-261
Number of pages29
JournalJournal of Applied Econometrics
Volume25
Issue number2
DOIs
StatePublished - Mar 1 2010

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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