Bayesian Learning of Impacts of Self-Exciting Jumps in Returns and Volatility
AbstractThe paper proposes a new class of continuous-time asset pricing models where negative jumps play a crucial role. Whenever there is a negative jump in asset returns, it is simultaneously passed on to diffusion variance and the jump intensity, generating self-exciting co-jumps of prices and volatility and jump clustering. To properly deal with parameter uncertainty and in-sample over-fitting, a Bayesian learning approach combined with an efficient particle filter is employed. It not only allows for comparison of both nested and non-nested models, but also generates all quantities necessary for sequential model analysis. Empirical investigation using S&P 500 index returns shows that volatility jumps at the same time as negative jumps in asset returns mainly through jumps in diffusion volatility. We find substantial evidence for jump clustering, in particular, after the recent financial crisis in 2008, even though parameters driving dynamics of the jump intensity remain difficult to identify.
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Bibliographic InfoPaper provided by Singapore Management University, School of Economics in its series Working Papers with number 03-2012.
Length: 44 pages
Date of creation: Jan 2012
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-ECM-2012-01-18 (Econometrics)
- NEP-RMG-2012-01-18 (Risk Management)
- NEP-SEA-2012-01-18 (South East Asia)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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CIRANO Working Papers
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