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Abstract

The alpha-stable family of distributions constitutes a generalization of the Gaussian distribution, allowing for asymmetry and thicker tails. Its many useful properties, including a central limit theorem, are especially appreciated in the financial field. However, estimation difficulties have up to now hindered its diffusion among practitioners. In this paper we propose an indirect estimation approach to stochastic volatility models with alpha-stable innovations that exploits, as auxiliary model, a GARCH(1,1) with t-distributed innovations. We consider both cases of heavytailed noise in the returns or in the volatility. The approach is illustrated by means of a detailed simulation study and an application to currency crises.

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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Statistica "G. Parenti" in its series Econometrics Working Papers Archive with number wp2006_07.

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Length: 24
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:fir:econom:wp2006_07

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This paper has been announced in the following NEP Reports:

• NEP-ALL-2007-01-28 (All new papers)
• NEP-ECM-2007-01-28 (Econometrics)
• NEP-ETS-2007-01-28 (Econometric Time Series)

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Cited by:

1. Matteo Barigozzi & Roxana Halbleib & David Veredas, 2012. "Which model to match?," Banco de España Working Papers 1229, Banco de España.
   
   • Matteo Barigozzi & Roxana Halbleib & David Veredas, 2012. "Which model to match?," ULB Institutional Repository 2013/136240, ULB -- Universite Libre de Bruxelles.
2. repec:eca:wpaper:2013/107223 is not listed on IDEAS
3. Parrini, Alessandro, 2012. "Indirect estimation of GARCH models with alpha-stable innovations," MPRA Paper 38544, University Library of Munich, Germany.
4. Dasheng Ji & B. Brorsen, 2011. "A recombining lattice option pricing model that relaxes the assumption of lognormality," Review of Derivatives Research, Springer, vol. 14(3), pages 349-367, October.

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