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An Empirical Investigation of Continuous-Time Equity Return Models

15 May 2012

Article by: Torben G. Andersen, Luca Benzoni, Jesper Lund
Published by: National Bureau of Economic Research
Date: Oct 2011

“This paper extends the class of stochastic volatility diffusions for asset returns to encompass Poisson jumps of time-varying intensity. We find that any reasonably descriptive continuous-time model for equity-index returns must allow for discrete jumps as well as stochastic volatility with a pronounced negative relationship between return and volatility innovations. We also find that the dominant empirical characteristics of the return process appear to be priced by the option market. Our analysis indicates a general correspondence between the evidence extracted from daily equity-index returns and the stylized features of the corresponding options market prices.”

Full article (PDF): Link

 
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