The volatility of financial returns is characterized by rapid and large increments. We propose an extension of the Heterogeneous Autoregressive model to incorporate jumps into the dynamics of the ex post volatility measures. Using the realized range measures of 36 NYSE stocks, we show that there is a positive probability of jumps in volatility. A common factor in the volatility jumps is shown to be related to a set of financial covariates (such as variance risk premium (VRP), S&P500 volume, credit default swap (CDS), and federal fund rates). The CDS on U.S. banks and VRP have predictive power on expected jump moves, thus confirming the common interpretation that sudden and large increases in equity volatility can be anticipated by credit deterioration of the U.S. bank sector as well as changes in the market expectations of future risks. Finally, the model is extended to incorporate the CDS and the VRP in the dynamics of the jump size and intensity.

Volatility jumps and their economic determinants / Caporin, Massimiliano; Rossi, Eduardo; Santucci de Magistris, Paolo. - In: JOURNAL OF FINANCIAL ECONOMETRICS. - ISSN 1479-8409. - 14:1(2016), pp. 29-80. [10.1093/jjfinec/nbu028]

Volatility jumps and their economic determinants

Santucci de Magistris, Paolo
2016

Abstract

The volatility of financial returns is characterized by rapid and large increments. We propose an extension of the Heterogeneous Autoregressive model to incorporate jumps into the dynamics of the ex post volatility measures. Using the realized range measures of 36 NYSE stocks, we show that there is a positive probability of jumps in volatility. A common factor in the volatility jumps is shown to be related to a set of financial covariates (such as variance risk premium (VRP), S&P500 volume, credit default swap (CDS), and federal fund rates). The CDS on U.S. banks and VRP have predictive power on expected jump moves, thus confirming the common interpretation that sudden and large increases in equity volatility can be anticipated by credit deterioration of the U.S. bank sector as well as changes in the market expectations of future risks. Finally, the model is extended to incorporate the CDS and the VRP in the dynamics of the jump size and intensity.
Volatility jumps and their economic determinants / Caporin, Massimiliano; Rossi, Eduardo; Santucci de Magistris, Paolo. - In: JOURNAL OF FINANCIAL ECONOMETRICS. - ISSN 1479-8409. - 14:1(2016), pp. 29-80. [10.1093/jjfinec/nbu028]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11385/178217
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