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Volatility, Jumps, and Predictability of Returns: A Sequential Analysis

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  • Davide Raggi
  • Silvano Bordignon

Abstract

In this article we propose a Monte Carlo algorithm for sequential parameter learning for a stochastic volatility model with leverage, nonconstant conditional mean and jumps. We are interested in estimating the time invariant parameters and the nonobservable dynamics involved in the model. Our simple but effective idea relies on the auxiliary particle filter algorithm mixed together with the Markov Chain Monte Carlo (MCMC) methodology. Adding an MCMC step to the auxiliary particle filter prevents numerical degeneracies in the sequential algorithm and allows sequential evaluation of the fixed parameters and the latent processes. Empirical evaluation on simulated and real data is presented to assess the performance of the algorithm. A numerical comparison with a full MCMC procedure is also provided. We also extend our methodology to superposition models in which volatility is obtained by a linear combination of independent processes.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 30 (2011)
Issue (Month): 6 ()
Pages: 669-695

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Handle: RePEc:taf:emetrv:v:30:y:2011:i:6:p:669-695

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Related research

Keywords: Auxiliary particle filters; Bayesian estimation; Leverage; MCMC; Return's predictability; Stochastic volatility with jumps;

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References

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  1. 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.
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  13. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
  14. Jun Liu & Francis A. Longstaff & Jun Pan, 2002. "Dynamic Asset Allocation With Event Risk," NBER Working Papers 9103, National Bureau of Economic Research, Inc.
  15. Davide Raggi, 2005. "Adaptive MCMC methods for inference on affine stochastic volatility models with jumps," Econometrics Journal, Royal Economic Society, vol. 8(2), pages 235-250, 07.
  16. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
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Cited by:
  1. Lawal A. I. & Oloye M. I. & Otekunrin A. O. & Ajayi S. A., 2013. "Returns on Investments and Volatility Rate in the Nigerian Banking Industry," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(10), pages 1298-1313, October.

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