## Some Like it Smooth, and Some Like it Rough: Untangling Continuous and Jump Components in Measuring, Modeling, and Forecasting Asset Return Volatility (2003)

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Citations: | 25 - 3 self |

### BibTeX

@MISC{Andersen03somelike,

author = {Torben G. Andersen and Tim Bollerslev and Francis X. Diebold},

title = {Some Like it Smooth, and Some Like it Rough: Untangling Continuous and Jump Components in Measuring, Modeling, and Forecasting Asset Return Volatility },

year = {2003}

}

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### Abstract

A rapidly growing literature has documented important improvements in volatility measurement and forecasting performance through the use of realized volatilities constructed from high-frequency returns coupled with relatively simple reduced form time series modeling procedures. Building on recent theoretical results from Barndorff-Nielsen and Shephard (2003c) for related bi-power variation measures involving the sum of high-frequency absolute returns, the present paper provides a practical framework for non-parametrically measuring the jump component in the realized volatility measurements. Exploiting these ideas for a decade of high-frequency five-minute returns for the DM/ $ exchange rate, the S&P500 aggregate market index, and the 30-year U.S. Treasury Bond, we find the jump components to be distinctly less persistent than the contribution to the overall return variability originating from the continuous sample path component of the price process. Explicitly including the jump measure as an additional explanatory variable in an easy-to-implement reduced form model for the realized volatilities results in highly significant jump coefficient estimates at the daily, weekly and quarterly forecasts horizons. As such, our results hold promise for improved financial asset allocation, risk management, and derivatives pricing, by separate modeling, forecasting and pricing of the continuous and jump components of the total return variability.