Department of Economics and Business Economics

Chasing Volatility: A Persistent Multiplicative Error Model with Jumps

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  • Massimiliano Caporin, University of Padova, Italy
  • Eduardo Rossi, University of Pavia - Department of Economics, Italy
  • Paolo Santucci de Magistris

Persistence and unpredictable large increments characterize the volatility of financial returns. We propose the Multiplicative Error Model with volatility jumps (MEM-J) to describe and predict the probability and the size of these extreme events. Under the MEM-J, the conditional density of the realized measure is a countably infinite mixture of Gamma and Kappa distributions, with closed form conditional moments. We derive stationarity conditions and the asymptotic theory for the maximum likelihood estimation. Estimates of the volatility jump component confirm that the probability of jumps dramatically increases during the financial crises. The MEM-J improves over other models with fat tails.

Original languageEnglish
JournalJournal of Econometrics
Volume198
Issue1
Pages (from-to)122-145
Number of pages24
ISSN0304-4076
DOIs
Publication statusPublished - 2017

    Research areas

  • Bipower variation, COMPONENTS, DYNAMICS, ESTIMATORS, GARCH PROCESSES, MAXIMUM-LIKELIHOOD-ESTIMATION, Multiplicative Error Model, PRICE, REALIZED VOLATILITY, RISK PREMIA, STOCK RETURNS, TIME-SERIES, Volatility jumps, Volatility-at-risk

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