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Maximum likelihood estimation of non-affine volatility processes

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  • Chourdakis, Kyriakos
  • Dotsis, George
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    Abstract

    In this paper we develop a new estimation method for extracting non-affine latent stochastic volatility and risk premia from measures of model-free realized and risk-neutral integrated volatility. We estimate non-affine models with nonlinear drift and constant elasticity of variance and we compare them to the popular square-root stochastic volatility model. Our empirical findings are: (1) the square-root model is misspecified; (2) the inclusion of constant elasticity of variance and nonlinear drift captures stylized facts of volatility dynamics and (3) the square-root stochastic volatility model is explosive under the risk-neutral probability measure.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0927539810000782
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 18 (2011)
    Issue (Month): 3 (June)
    Pages: 533-545

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    Handle: RePEc:eee:empfin:v:18:y:2011:i:3:p:533-545

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Non-affine volatility Integrated volatility Volatility risk premium Markov chain approximation;

    References

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    Cited by:
    1. Wu, Xin-Yu & Ma, Chao-Qun & Wang, Shou-Yang, 2012. "Warrant pricing under GARCH diffusion model," Economic Modelling, Elsevier, vol. 29(6), pages 2237-2244.
    2. Kaeck, Andreas & Alexander, Carol, 2013. "Continuous-time VIX dynamics: On the role of stochastic volatility of volatility," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 46-56.

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