The Impact of Jumps and Leverage in Forecasting Co-Volatility

Abstract

The paper investigates the impact of jumps in forecasting co-volatility, accommodating leverage

effects. We modify the jump-robust two time scale covariance estimator of Boudt and Zhang (2013)

such that the estimated matrix is positive definite. Using this approach we can disentangle the

estimates of the integrated co-volatility matrix and jump variations from the quadratic covariation

matrix. Empirical results for three stocks traded on the New York Stock Exchange indicate that

the co-jumps of two assets have a significant impact on future co-volatility, but that the impact

is negligible for forecasting weekly and monthly horizons.