The economic value of volatility timing with realized jumps |
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| Institution: | 1. Accounting and Finance Department, Lancaster University Management School, Lancaster University, Lancaster LA1 4YX, United Kingdom;2. Finance Group, Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom;1. Department of Actuarial Studies and Business Analytics, Macquarie Business School, Macquarie University, Eastern Road, North Ryde, NSW 2109, Australia;2. Department of Management, Economics and Quantitative Methods, University of Bergamo, Via dei Caniana 2, 24127 Bergamo, Italy;3. VSB TU of Ostrava, Department of Finance, Ostrava - Czech Republic |
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| Abstract: | This paper comprehensively investigates the role of realized jumps detected from high frequency data in predicting future volatility from both statistical and economic perspectives. Using seven major jump tests, we show that separating jumps from diffusion improves volatility forecasting both in-sample and out-of-sample. Moreover, we show that these statistical improvements can be translated into economic value. We find that a risk-averse investor can significantly improve her portfolio performance by incorporating realized jumps into a volatility timing based portfolio strategy. Our results hold true across the majority of jump tests, and are robust to controlling for microstructure effects and transaction costs. |
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