Beyond Stochastic Volatility and Jumps in Returns and Volatility
AbstractWhile a great deal of attention has been focused on stochastic volatility in stock returns, there is strong evidence suggesting that return distributions have time-varying skewness and kurtosis as well. Under the risk-neutral measure, for example, this can be observed from variation across time in the shape of Black--Scholes implied volatility smiles. This article investigates model characteristics that are consistent with variation in the shape of return distributions using a stochastic volatility model with a regime-switching feature to allow for random changes in the parameters governing volatility of volatility, leverage effect, and jump intensity. The analysis consists of two steps. First, the models are estimated using only information from observed returns and option-implied volatility. Standard model assessment tools indicate a strong preference in favor of the proposed models. Since the information from option-implied skewness and kurtosis is not used in fitting the models, it is available for diagnostic purposes. In the second step of the analysis, regressions of option-implied skewness and kurtosis on the filtered state variables (and some controls) suggest that the models have strong explanatory power for these characteristics.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Journal of Business & Economic Statistics.
Volume (Year): 31 (2013)
Issue (Month): 1 (January)
Contact details of provider:
Web page: http://www.tandfonline.com/UBES20
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Marcos Escobar & Daniela Neykova & Rudi Zagst, 2014. "Portfolio Optimization in Affine Models with Markov Switching," Papers 1403.5247, arXiv.org.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.