The relationship between the volatility of returns and the number of jumps in financial markets
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: | 02 Aug 2023 17:06 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/7607 |
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