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Validity of discrete-time stochastic volatility models in non-synchronous equity markets

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Author Info
Per Bjarte Solibakke
Abstract

The paper investigates the validity of versions of discrete-time stochastic volatility models for index series known to contain component stocks exhibiting non-synchronous trading. The efficient method of moments (EMM) is used to fit versions of the discrete-time stochastic volatility (SV) model. The EMM methodology confronts moment conditions generated by a score generator (SNP) that are valid by construction. The moment generator suggests non-linearity in the index series. The EMM construction shows that a classical discrete time stochastic volatility model is rejected. An extended model incorporating an asymmetric volatility specification validates all the moment scores. Option values from Black and Scholes (BS) and Monte Carlo simulations (MC) seem significantly different. The results suggest that BS does not price asymmetry adequately. Asymmetry suggests increased market risk inducing higher BS call prices and lower (higher) BS put pricing for ATM and OTM options (ITM) relative to MC.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 9 (2003)
Issue (Month): 5 (October)
Pages: 420-448
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Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:420-448

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Related research
Keywords: Non-synchronous Trading; Discrete-time Stochastic Volatility; Efficient Method Of Moments;

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  5. Bansal, Ravi & Gallant, A. Ronald & Hussey, Robert & Tauchen, George, 1995. "Nonparametric estimation of structural models for high-frequency currency market data," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 251-287. [Downloadable!] (restricted)
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  9. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
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