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An Empirical Investigation of Continuous‐Time Equity Return Models
Author(s) -
Andersen Torben G.,
Benzoni Luca,
Lund Jesper
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00460
Subject(s) - stylized fact , economics , econometrics , equity (law) , volatility (finance) , stochastic volatility , financial economics , index (typography) , computer science , world wide web , political science , law , macroeconomics
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.