Department of Economics and Business Economics

A Reduced Form Framework for Modeling Volatility of Speculative Prices based on Realized Variation Measures

Research output: Working paper/Preprint Working paperResearch

  • Torben G. Andersen, Northwestern University, United States
  • Tim Bollerslev
  • Xin Huang, Duke University, United States
  • School of Economics and Management
Building on realized variance and bi-power variation measures constructed from
high-frequency financial prices, we propose a simple reduced form framework for effectively
incorporating intraday data into the modeling of daily return volatility. We decompose the
total daily return variability into the continuous sample path variance, the variation arising
from discontinuous jumps that occur during the trading day, as well as the overnight return
variance. Our empirical results, based on long samples of high-frequency equity and bond
futures returns, suggest that the dynamic dependencies in the daily continuous sample path
variability is well described by an approximate long-memory HAR-GARCH model, while the
overnight returns may be modelled by an augmented GARCH type structure. The dynamic
dependencies in the non-parametrically identified significant jumps appear to be well described
by the combination of an ACH model for the time-varying jump intensities coupled
with a relatively simple log-linear structure for the jump sizes. Lastly, we discuss how the
resulting reduced form model structure for each of the three components may be used in the
construction of out-of-sample forecasts for the total return volatility.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages31
Publication statusPublished - 2007

    Research areas

  • Stochastic Volatility, Realized Variation, Bipower Variation, Jumps, Hazard Rates, Overnight Volatility

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ID: 10569537