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The Danish National Research Foundation:
Network in Mathematical Physics and Stochastics



Funded by The Danish National Research Foundation

MPS-RR 2003-29
November 2003




Power and Bipower Variation with Stochastic Volatility and Jumps

by: Ole E. Barndorff-Nielsen, Neil Shephard

Abstract

This paper shows that realised power variation and its extension called realised bipower variation that we introduce here is somewhat robust to rare jumps. We demonstrate that in special cases realised bipower variation estimate integrated variance in stochastic volatility models, thus providing a model free and consistent alternative to realised variance. Its robustness property means that if we have a stochastic volatility plus infrequent jumps process then the difference between realised variance and realised bipower variation estimates the quadratic variation of the jump component. This seems to be the first method which can seperate quadratic variation into its continuous and jump components. Various extensions are given, together with proofs of special cases of these results. Detailed mathematical results will be reported elsewhere

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