How Crashes Develop: Intradaily Volatility and Crash Evolution
NBER Working Paper No. 22028
This paper explores whether affine models with volatility jumps estimated on intradaily S&P 500 futures data over 1983-2008 can capture major daily outliers such as the 1987 stock market crash. I find that intradaily jumps in futures prices are typically small, and that self-exciting but short-lived volatility spikes capture intradaily and daily returns better. Multifactor models of the evolution of diffusive variance and jump intensities improve fits substantially, including out-of-sample over 2009-13. The models capture reasonably well the conditional distributions of daily returns and of realized variance outliers, but underpredict realized variance inliers.
Document Object Identifier (DOI): 10.3386/w22028
Published: DAVID S. BATES, 2019. "How Crashes Develop: Intradaily Volatility and Crash Evolution," The Journal of Finance, vol 74(1), pages 193-238.
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