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 |
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Authors: | Torben G Andersen Tim Bollerslev Dobrislav Dobrev |
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Institution: | 1. Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, USA;2. Department of Economics, Duke University, Durham, NC 27708, USA;3. NBER, Cambridge, MA, USA |
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Abstract: | 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. |
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Keywords: | C22 C15 C52 G10 C80 |
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