A reduced form framework for modeling volatility of speculative prices based on realized variation measures

Published

Journal Article

Building on realized variance and bipower variation measures constructed from high-frequency financial prices, we propose a simple reduced form framework for effectively incorporating intraday data into the modeling of daily return volatility. We decompose the total daily return variability into the continuous sample path variance, the variation arising from discontinuous jumps that occur during the trading day, as well as the overnight return variance. Our empirical results, based on long samples of high-frequency equity and bond futures returns, suggest that the dynamic dependencies in the daily continuous sample path variability are well described by an approximate long-memory HARGARCH model, while the overnight returns may be modeled by an augmented GARCH type structure. The dynamic dependencies in the non-parametrically identified significant jumps appear to be well described by the combination of an ACH model for the time-varying jump intensities coupled with a relatively simple log-linear structure for the jump sizes. Finally, we discuss how the resulting reduced form model structure for each of the three components may be used in the construction of out-of-sample forecasts for the total return volatility. © 2010 Elsevier B.V. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Andersen, TG; Bollerslev, T; Huang, X

Published Date

  • January 1, 2011

Published In

Volume / Issue

  • 160 / 1

Start / End Page

  • 176 - 189

International Standard Serial Number (ISSN)

  • 0304-4076

Digital Object Identifier (DOI)

  • 10.1016/j.jeconom.2010.03.029

Citation Source

  • Scopus