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Good Volatility, Bad Volatility: Signed Jumps and the Persistence of Volatility

25 May 2012

Article by: Andrew J. Patton, Kevin Sheppard
Published by: Duke University
Date: 7 Oct 2011

“Using recently proposed estimators of the variation of positive and negative returns (“realized semivariances”), and high frequency data for the S&P 500 index and 105 individual stocks, this paper sheds new light on the predictability of equity price volatility. We show that future volatility is much more strongly related to the volatility of past negative returns than to that of positive returns, and this effect is stronger than that implied by standard asymmetric GARCH models. We also find that the impact of a jump on future volatility critically depends on the sign of the jump, with negative (positive) jumps in prices leading to significantly higher (lower) future volatility. A simple model exploiting these findings leads to significantly better out-of-sample forecast performance, across forecast horizons ranging from 1 day to 3 months”

Full article (PDF): Link

 
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