An empirical application of a two-factor model of stochastic volatility
AbstractThis contribution focuses on the modelling of volatility of returns in Czech and US stock markets using a two-factor stochastic volatility model, i.e. the volatility process is modeled as a superposition of two autoregressive processes. As the volatility is not observable, the logarithm of the daily range is employed as the proxy. The estimation of parameters and volatility extraction are performed using the Kalman filter. We have obtained a meaningful decomposition of the volatility process into one highly persistent factor and another quickly mean-reverting factor. Moreover, we have shown that although the overall level of the volatility of returns is roughly the same in both markets, the US market exhibits substantially lower volatility of the volatility process.
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Bibliographic InfoArticle provided by University of Economics, Prague in its journal Prague Economic Papers.
Volume (Year): 2008 (2008)
Issue (Month): 3 ()
Postal: Editorial office Prague Economic Papers, University of Economics, nám. W. Churchilla 4, 130 67 Praha 3, Czech Republic
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- Christensen, Kim & Podolskij, Mark, 2007. "Realized range-based estimation of integrated variance," Journal of Econometrics, Elsevier, vol. 141(2), pages 323-349, December.
- Martens, Martin & van Dijk, Dick, 2007. "Measuring volatility with the realized range," Journal of Econometrics, Elsevier, vol. 138(1), pages 181-207, May.
- Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
- Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
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