Asymmetry in Stochastic Volatility Models: Threshold or Correlation?
AbstractWe compare the ability of correlation and threshold effects in a stochastic volatility model to capture the asymmetric relationship between stock returns and volatility. The parameters are estimated using maximum likelihood based on the extended Kalman filter and uses numerical integration over the latent volatility process. The stochastic volatility model with only correlation does a better job of capturing asymmetry than a threshold stochastic volatility model even though it has fewer parameters. We develop a stochastic volatility model that includes both threshold effects and correlated innovations. We find that the general model with both threshold effects and correlated innovations dominates purely threshold and correlated models. In this augmented model volatility and returns are negatively correlated, and volatility is more persistent, less volatile and higher following negative returns even after counting for the negative correlation.
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Bibliographic InfoArticle provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.
Volume (Year): 13 (2009)
Issue (Month): 3 (May)
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Web page: http://www.degruyter.com
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- Xiuping Mao & Esther Ruiz & Helena Veiga, 2013. "One for all : nesting asymmetric stochastic volatility models," Statistics and Econometrics Working Papers, Universidad Carlos III, Departamento de EstadÃstica y EconometrÃa ws131110, Universidad Carlos III, Departamento de EstadÃstica y EconometrÃa.
- Montero, JosÃ© M. & GarcÃa-Centeno, Maria C. & FernÃ¡ndez-AvilÃ©s, Gema, 2011. "Modelling the Volatility of the Spanish Wholesale Electricity Spot Market. Asymmetric GARCH Models vs. Threshold ARSV model/ModelizaciÃ³n de la volatilidad en el mercado elÃ©ctrico espaÃ±ol. Modelos G," Estudios de EconomÃa Aplicada, Estudios de EconomÃa Aplicada, vol. 29, pages 597-616, Agosto.
- Listorti, Giulia & Esposti, Roberto, 2012. "Horizontal Price Transmission in Agricultural Markets: Fundamental Concepts and Open Empirical Issues," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), Italian Association of Agricultural and Applied Economics (AIEAA), issue 1, April.
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