Cartea, Alvaro and Karyampas, Dimitrios (2009) The relationship between the volatility of returns and the number of jumps in financial markets. Working Paper. Birkbeck College, University of London, London, UK.
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Abstract
The contribution of this paper is two-fold. First we show how to estimate the volatility of high frequency log-returns where the estimates are not affected by microstructure noise and the presence of Lévy-type jumps in prices. The second contribution focuses on the relationship between the number of jumps and the volatility of log-returns of the SPY, which is the fund that tracks the S&P 500. We employ SPY high frequency data (minute-by-minute) to obtain estimates of the volatility of the SPY log-returns to show that: (i) The number of jumps in the SPY is an important variable in explaining the daily volatility of the SPY log-returns; (ii) The number of jumps in the SPY prices has more explanatory power with respect to daily volatility than other variables based on: volume, number of trades, open and close, and other jump activity measures based on Bipower Variation; (iii) The number of jumps in the SPY prices has a similar explanatory power to that of the VIX, and slightly less explanatory power than measures based on high and low prices, when it comes to explaining volatility; (iv) Forecasts of the average number of jumps are important variables when producing monthly volatility forecasts and, furthermore, they contain information that is not impounded in the VIX.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| Additional Information: | BWPEF 0914 |
| Keyword(s) / Subject(s): | volatility forecasts, high-frequency data, implied volatility, VIX, jumps, microstructure noise |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Administrator |
| Date Deposited: | 09 Jul 2013 14:27 |
| Last Modified: | 10 Aug 2024 21:55 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/7607 |
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