Realized Laplace Transforms for Estimation of Jump Diffusive Volatility Models
, George Tauchen and Iaryna Grynkiv
We develop an efficient and analytically tractable method for estimation of parametric volatility models that is robust to price-level jumps. The method entails first integrating intra-day data into the Realized Laplace Transform of volatility, which is model-free estimate of daily integrated empirical Laplace transform of the unobservable volatility. The estimation then is done by matching moments of the integrated joint Laplace transform with those implied by the parametric volatility model. In the empirical application, the best fitting volatility model is a non-diffusive two-factor model where low activity jumps drive its persistent component and more active jumps drive the transient one.
, George Tauchen and Iaryna Grynkiv. 2011. Realized Laplace Transforms for Estimation of Jump Diffusive Volatility Models. Journal of Econometrics. 164(2): 367-381.