The impact of jumps and leverage in forecasting covolatility

ABSTRACT

The paper investigates the impact of jumps in forecasting covolatility, accommodating leverage effects. We modify the preaveraged truncated covariance estimator of Koike (2016) such that the estimated matrix is positive definite. Using this approach, we can disentangle the estimates of the integrated covolatility matrix and jump variations from the quadratic covariation matrix. Empirical results for three stocks traded on the New York Stock Exchange indicate that the cojumps of two assets have a significant impact on future covolatility, but the impact is negligible for forecasting weekly and monthly horizons.

KEYWORDS:

• Covolatility
• forecasting
• jump
• leverage effects
• realized covariance
• threshold estimation

JEL CLASSIFICATION:

• C32
• C53
• C58
• G17

Acknowledgments

The authors are most grateful to Yoshi Baba and Karen Lewis, and two anonymous referees for very helpful comments and suggestions. The first author acknowledges the financial support of the Japan Ministry of Education, Culture, Sports, Science and Technology, Japan Society for the Promotion of Science (KAKENHI Grant Number 25380271), and Australian Academy of Science. The second author is most grateful for the financial support of the Australian Research Council, National Science Council, Ministry of Science and Technology, Taiwan, and the Japan Society for the Promotion of Science.