An examination of the continuous-time dynamics of international volatility indices amid the recent market turmoil
AbstractVolatility indices have been designed for many markets as gauges to measure investors' fear of market crash. The recent market turmoil has produced historically high volatility levels. We take a look at the behavior of the VIX and VSTOXX indices by including the recent market turmoil into the data. We estimate various continuous-time models with focus on the structure of the drift and diffusion functions. Two methodologies are utilized: the maximum likelihood estimation, and Aït-Sahalia's parametric specification test. While the results from the parametric specification test advocate strongly for specifying more flexible drift and diffusion functions, nonlinear drift structure often only adds negligible benefit in terms of the likelihood function value. Simulation is carried out to study the finite sample bias and jump omission bias. Our results call for caution against finite sample bias when adopting a particular model or fixing a particular parameter vector.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 22 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/jempfin
Volatility indices; Continuous-time dynamics; Maximum likelihood estimation; Parametric specification test;
Find related papers by JEL classification:
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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