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Asymmetry in Stochastic Volatility Models: Threshold or Correlation?

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  • Smith Daniel R

    ()
    (Simon Fraser University)

Abstract

We 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 Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 13 (2009)
Issue (Month): 3 (May)
Pages: 1-36

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Handle: RePEc:bpj:sndecm:v:13:y:2009:i:3:n:1

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Cited by:
  1. Montero, José M. & García-Centeno, Maria C. & Fernández-Avilés, Gema, 2011. "Modelling the Volatility of the Spanish Wholesale Electricity Spot Market. Asymmetric GARCH Models vs. Threshold ARSV model/Modelización de la volatilidad en el mercado eléctrico español. Modelos G," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 29, pages 597-616, Agosto.
  2. 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), issue 1, April.
  3. Xiuping Mao & Esther Ruiz & Helena Veiga, 2013. "One for all : nesting asymmetric stochastic volatility models," Statistics and Econometrics Working Papers ws131110, Universidad Carlos III, Departamento de Estadística y Econometría.

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