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Asymmetry in stochastic volatility models with threshold and time-dependent correlation

Author

Listed:
  • Schäfers Torben
  • Teng Long

    (Lehrstuhl für Angewandte Mathematik und Numerische Analysis, Fakultät für Mathematik und Naturwissenschaften, Bergische Universität Wuppertal, Gaußstr. 20, 42119, Wuppertal, Germany)

Abstract

In this work we study the effects by including threshold, constant and time-dependent correlation in stochastic volatility (SV) models to capture the asymmetry relationship between stock returns and volatility. We develop SV models which include only time-dependent correlated innovations and both threshold and time-dependent correlation, respectively. It has been shown in literature that the SV model with only constant correlation does a better job of capturing asymmetry than threshold stochastic volatility (TSV) model. We show here that the SV model with time-dependent correlation performs better than the model with constant correlation on capturing asymmetry, and the comprehensive model with both threshold and time-dependently correlated innovations dominates models with pure threshold, constant and time-dependent correlation, and both threshold and constant correlation as well. In our comprehensive model, volatility and returns are time-dependently correlated, where the time-varying correlation is negative, and the volatility is more persistent, less volatile and higher following negative returns as expected. An empirical study is provided to illustrate our findings.

Suggested Citation

  • Schäfers Torben & Teng Long, 2023. "Asymmetry in stochastic volatility models with threshold and time-dependent correlation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 27(2), pages 131-146, April.
    • Handle: RePEc:bpj:sndecm:v:27:y:2023:i:2:p:131-146:n:2
    DOI: 10.1515/snde-2021-0020
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