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    Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Empirical Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Empirical Finance, 34, 2015 DOI: 10.1016/j.jempfin.2015.03.019

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The economic value of volatility timing with realized jumps

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>12/2015
<mark>Journal</mark>Journal of Empirical Finance
Volume34
Number of pages15
Pages (from-to)45-59
Publication statusPublished
Early online date1/09/15
Original languageEnglish

Abstract

This paper comprehensively investigates the role of realized jumps detected from high frequency data in predicting future volatility from both statistical and economic perspectives. Using seven major jump tests, we show that separating jumps from diffusion improves volatility forecasting both in-sample and out-of-sample. Moreover, we show that these statistical improvements can be translated into economic value. We find a risk-averse investor can significantly improve her portfolio performance by incorporating realized jumps into a volatility timing based portfolio strategy. Our results hold true across the majority of jump tests, and are robust to controlling for microstructure effects and transaction costs.

Bibliographic note

18 month embargo This is the author’s version of a work that was accepted for publication in Journal of Empirical Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Empirical Finance, 34, 2015 DOI: 10.1016/j.jempfin.2015.03.019