Continuous-time models, realized volatilities, and testable distributional implications for daily stock returns
Article first published online: 23 JUL 2009
Copyright © 2009 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 25, Issue 2, pages 233–261, March 2010
How to Cite
Andersen, T. G., Bollerslev, T., Frederiksen, P. and Ørregaard Nielsen, M. (2010), Continuous-time models, realized volatilities, and testable distributional implications for daily stock returns. J. Appl. Econ., 25: 233–261. doi: 10.1002/jae.1105
- Issue published online: 27 JAN 2010
- Article first published online: 23 JUL 2009
- Danish Social Sciences Research Council. Grant Number: FSE 275-05-0220
- Danish National Research Foundation
We provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous-time jump diffusion models traditionally used in asset pricing finance. Our approach builds directly on recently developed realized variation measures and non-parametric jump detection statistics constructed from high-frequency intra-day data. A sequence of simple-to-implement moment-based tests involving various transformations of the daily returns speak directly to the importance of different distributional features, and may serve as useful diagnostic tools in the specification of empirically more realistic continuous-time asset pricing models. On applying the tests to the 30 individual stocks in the Dow Jones Industrial Average index, we find that it is important to allow for both time-varying diffusive volatility, jumps, and leverage effects to satisfactorily describe the daily stock price dynamics. Copyright © 2009 John Wiley & Sons, Ltd.