Alternative Formulations of the Leverage Effect in a Stochastic Volatility Model with Asymmetric Heavy-Tailed Errors

Alternative Formulations of the Leverage Effect in a Stochastic Volatility Model with Asymmetric Heavy-Tailed Errors
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Total Pages : 41
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ISBN-10 : OCLC:1306214313
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Book Synopsis Alternative Formulations of the Leverage Effect in a Stochastic Volatility Model with Asymmetric Heavy-Tailed Errors by : Philippe J. Deschamps

Download or read book Alternative Formulations of the Leverage Effect in a Stochastic Volatility Model with Asymmetric Heavy-Tailed Errors written by Philippe J. Deschamps and published by . This book was released on 2016 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates three formulations of the leverage effect in a stochastic volatility model with a skewed and heavy-tailed observation distribution. The first formulation is the conventional one, where the observation and evolution errors are correlated. The second is a hierarchical one, where log-volatility depends on the past log-return multiplied by a time-varying latent coefficient. In the third formulation, this coefficient is replaced by a constant. The three models are compared with each other and with a GARCH formulation, using Bayes factors. MCMC estimation relies on a parametric proposal density estimated from the output of a particle smoother. The results, obtained with recent S&P500 and Swiss Market Index data, suggest that the last two leverage formulations strongly dominate the conventional one. The performance of the MCMC method is consistent across models and sample sizes, and its implementation only requires a very modest (and constant) number of filter and smoother particles.

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