Department of Economics and Business Economics

Chasing volatility: A persistent multiplicative error model with jumps

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  • rp14_29

    Final published version, 671 KB, PDF document

  • Massimiliano Caporin, University of Padova, Italy
  • Eduardo Rossi, University of Pavia - Department of Economics, Italy
  • Paolo Santucci de Magistris
The realized volatility of financial returns is characterized by persistence and occurrence of unpreditable large increments. To capture those features, we introduce the Multiplicative Error Model with jumps (MEM-J). When a jump component is included in the multiplicative specification, the conditional density of the realized measure is shown to be a countable infinite mixture of Gamma and K distributions. Strict stationarity conditions are derived. A Monte Carlo simulation experiment shows that maximum likelihood estimates of the model parameters are reliable even when jumps are rare events. We estimate alternative specifications of the model using a set of daily bipower measures for 7 stock indexes and 16 individual NYSE stocks. The estimates of the jump component confirm that the probability of jumps dramatically increases during the financial crisis. Compared to other realized volatility models, the introduction of the jump component provides a sensible improvement in the fit, as well as for in-sample and out-of-sample volatility tail forecasts.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages52
Publication statusPublished - 4 Sep 2014
SeriesCREATES Research Papers

    Research areas

  • Multiplicative Error Model with Jumps, Jumps in volatility, Realized measures, Volatility-at-Risk

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