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Stochastic Volatility Models And The Taylor Effect

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  • Alberto Mora-Galan
  • Ana Perez
  • Esther Ruiz

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Abstract

It has been often empirically observed that the sample autocorrelations of absolute financial returns are larger than those of squared returns. This property, know as Taylor effect, is analysed in this paper in the Stochastic Volatility (SV) model framework. We show that the stationary autoregressive SV model is able to generate this property for realistic parameter specifications. On the other hand, the Taylor effect is shown not to be a sampling phenomena due to estimation biases of the sample autocorrelations. Therefore, financial models that aims to explain the behaviour of financial returns should take account of this property.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws046315.

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Date of creation: Nov 2004
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Handle: RePEc:cte:wsrepe:ws046315

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  1. Eric Ghysels & Andrew Harvey & Éric Renault, 1995. "Stochastic Volatility," CIRANO Working Papers 95s-49, CIRANO.
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  4. Carmen Broto & Esther Ruiz, 2002. "Estimation Methods For Stochastic Volatility Models: A Survey," Statistics and Econometrics Working Papers ws025414, Universidad Carlos III, Departamento de Estadística y Econometría.
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  13. Jurgen Doornik & Marius Ooms, 2005. "Outlier Detection in GARCH Models," Economics Series Working Papers 2005-W24, University of Oxford, Department of Economics.
  14. He, Changli & Teräsvirta, Timo, 1997. "Properties of Moments of a Family of GARCH Processes," Working Paper Series in Economics and Finance 198, Stockholm School of Economics.
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  17. Olivier V. Pictet & Michel M. Dacorogna & Ulrich A. Muller, 1996. "Heavy tails in high-frequency financial data," Working Papers 1996-12-11, Olsen and Associates.
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Citations

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Cited by:
  1. Esther Ruiz & Helena Veiga, 2006. "Modelling Long-Memory Volatilities With Leverage Effect: Almsv Versus Fiegarch," Statistics and Econometrics Working Papers ws066016, Universidad Carlos III, Departamento de Estadística y Econometría.
  2. Haas, Markus, 2009. "Persistence in volatility, conditional kurtosis, and the Taylor property in absolute value GARCH processes," Statistics & Probability Letters, Elsevier, vol. 79(15), pages 1674-1683, August.
  3. Gonçalves, Esmeralda & Leite, Joana & Mendes-Lopes, Nazaré, 2009. "A mathematical approach to detect the Taylor property in TARCH processes," Statistics & Probability Letters, Elsevier, vol. 79(5), pages 602-610, March.

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