Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns

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 intraday 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 specifcation of empirically more realistic continuous-time asset pricing models. On applying the tests to the thirty 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.


Issue Date:
2008-07
Publication Type:
Working or Discussion Paper
Record Identifier:
https://ageconsearch.umn.edu/record/273649
Language:
English
Total Pages:
69
JEL Codes:
C01; G01
Series Statement:
Working Paper No. 1173




 Record created 2018-06-13, last modified 2018-06-14

Fulltext:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)