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Realized Volatility and Multipower Variation

Author

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  • Torben G. Andersen

    (Kellogg School of Management, Northwestern University and CREATES)

  • Viktor Todorov

    (Kellogg School of Management, Northwestern University)

Abstract

This paper reviews basic notions of return variation in the context of a continuous-time arbitrage-free asset pricing model and discusses some of their applications. We first define return variation in the infeasible continuous-sampling case. Then we introduce realized measures obtained from high-frequency observations which provide consistent and asymptotically normal estimates of the underlying return variation. The paper discusses applications of these measures for reduced-form volatility modeling and forecasting as well as testing for the presence of jumps.

Suggested Citation

  • Torben G. Andersen & Viktor Todorov, 2009. "Realized Volatility and Multipower Variation," CREATES Research Papers 2009-49, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2009-49
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    References listed on IDEAS

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    5. António Alberto Santos, 2015. "The evolution of the Volatility in Financial Returns: Realized Volatility vs Stochastic Volatility Measures," GEMF Working Papers 2015-10, GEMF, Faculty of Economics, University of Coimbra.
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    11. V. Candila & O. Cepni & G. M. Gallo & R. Gupta, 2024. "Influence of Local and Global Economic Policy Uncertainty on the volatility of US state-level equity returns: Evidence from a GARCH-MIDAS approach with Shrinkage and Cluster Analysis," Working Paper CRENoS 202414, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    12. Li, Jiang-Cheng & Tao, Chen & Li, Hai-Feng, 2022. "Dynamic forecasting performance and liquidity evaluation of financial market by Econophysics and Bayesian methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 588(C).
    13. Yun, Jaeho, 2020. "Variance risk premium in a small open economy with volatile capital flows: The case of Korea," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 105-125.
    14. Będowska-Sójka, Barbara & Kliber, Agata, 2021. "Information content of liquidity and volatility measures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 563(C).
    15. Ben Ammar, Imen & Hellara, Slaheddine, 2022. "High-frequency trading, stock volatility, and intraday crashes," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 337-344.
    16. Jonathan R. Stroud & Michael S. Johannes, 2014. "Bayesian Modeling and Forecasting of 24-Hour High-Frequency Volatility," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 109(508), pages 1368-1384, December.
    17. Chen, Cathy W.S. & Watanabe, Toshiaki & Lin, Edward M.H., 2023. "Bayesian estimation of realized GARCH-type models with application to financial tail risk management," Econometrics and Statistics, Elsevier, vol. 28(C), pages 30-46.
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    19. Makoto Takahashi & Yuta Yamauchi & Toshiaki Watanabe & Yasuhiro Omori, 2024. "Realized Stochastic Volatility Model with Skew-t Distributions for Improved Volatility and Quantile Forecasting," Papers 2401.13179, arXiv.org, revised Oct 2024.
    20. Stoffman, Noah & Woeppel, Michael & Yavuz, M. Deniz, 2022. "Small innovators: No risk, No return," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    21. Zhong, Guang-Yan & Li, Jiang-Cheng & Jiang, George J. & Li, Hai-Feng & Tao, Hui-Ming, 2018. "The time delay restraining the herd behavior with Bayesian approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 507(C), pages 335-346.
    22. Bunek, Gabriel D. & Janzen, Joseph P., 2024. "Does public information facilitate price consensus? Characterizing USDA announcement effects using realized volatility," Journal of Commodity Markets, Elsevier, vol. 33(C).
    23. Liu, Qiang & Liu, Yiqi & Liu, Zhi, 2018. "Estimating spot volatility in the presence of infinite variation jumps," Stochastic Processes and their Applications, Elsevier, vol. 128(6), pages 1958-1987.
    24. Bakshi, Gurdip & Panayotov, George & Skoulakis, Georgios, 2011. "Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios," Journal of Financial Economics, Elsevier, vol. 100(3), pages 475-495, June.

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    More about this item

    Keywords

    realized volatility; multipower variation; jumps; quadratic variation; volatility estimation; volatility forecasting; jump testing; continuous-time stochastic volatility model.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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