A Stochastic Feedback Model for Volatility
AbstractFinancial time series exhibit a number of interesting properties that are difficult to explain with simple models. These properties include fat-tails in the distribution of price fluctuations (or returns) that are slowly removed at longer timescales, strong autocorrelations in absolute returns but zero autocorrelation in returns themselves, and multifractal scaling. Although the underlying cause of these features is unknown, there is growing evidence they originate in the behavior of volatility, i.e., in the behavior of the magnitude of price fluctuations. In this paper, we posit a feedback mechanism for volatility that closely reproduces the non-trivial properties of empirical prices. The model is parsimonious, contains only two parameters that are easily estimated, fits empirical data better than standard models, and can be grounded in a straightforward framework where volatility fluctuations are driven by the estimation error of an exogenous Poisson rate.
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 InfoPaper provided by arXiv.org in its series Papers with number 1306.4975.
Date of creation: Jun 2013
Date of revision: Nov 2013
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-24 (All new papers)
- NEP-ECM-2013-06-24 (Econometrics)
- NEP-ETS-2013-06-24 (Econometric Time Series)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.