No-arbitrage semi-martingale restrictions for continuous-time volatility models subject to leverage effects, jumps and i.i.d. noise: Theory and testable distributional implications

Published

Journal Article

We develop a sequential procedure to test the adequacy of jump-diffusion models for return distributions. We rely on intraday data and nonparametric volatility measures, along with a new jump detection technique and appropriate conditional moment tests, for assessing the import of jumps and leverage effects. A novel robust-to-jumps approach is utilized to alleviate microstructure frictions for realized volatility estimation. Size and power of the procedure are explored through Monte Carlo methods. Our empirical findings support the jump-diffusive representation for S&P500 futures returns but reveal it is critical to account for leverage effects and jumps to maintain the underlying semi-martingale assumption. © 2006 Elsevier B.V. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Andersen, TG; Bollerslev, T; Dobrev, D

Published Date

  • May 1, 2007

Published In

Volume / Issue

  • 138 / 1

Start / End Page

  • 125 - 180

International Standard Serial Number (ISSN)

  • 0304-4076

Digital Object Identifier (DOI)

  • 10.1016/j.jeconom.2006.05.018

Citation Source

  • Scopus