Department of Economics and Business Economics

Volatility jumps and their economic determinants

Research output: Working paperResearch

Documents

  • rp14_27

    Submitted manuscript, 779 KB, PDF document

  • Massimiliano Caporin, University of Padova, Italy
  • Eduardo Rossi, University of Pavia - Department of Economics, Italy
  • Paolo Santucci de Magistris
The volatility of financial returns is characterized by rapid and large increments. We propose an extension of the Heterogenous Autoregressive model to incorporate jumps into the dynamics of the ex-post volatility measures. Using the realized-range measures of 36 BNYSE stocks, we show that there is a positive probability of jumps in volatility. A common factor in the volatility jumps is shown to be related to a set of financial covariates (such as variance risk premium, S&P500 volume, credit-default swap, and federal fund rates). The credit-default swap on US banks and variance risk premium have predictive power on expected jump moves, thus confirming the common interpretation that sudden and large increases in equity volatility can be anticipated by credit deterioration of the US bank sector as well as changes in the market expectations of future risks. Finally, the model is extended to incorporate the credit-default swap and the variance risk premium in the dynamics of the jump size and intensity.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages47
Publication statusPublished - 25 Aug 2014
SeriesCREATES Research Papers
Number2014-27

    Research areas

  • Volatility jumps, Realized range, HAR-V-J, CDS

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