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Testing CEV stochastic volatility models using implied volatility index data

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  • Kim, Jungmu
  • Park, Yuen Jung
  • Ryu, Doojin

Abstract

We test the goodness-of-fit of stochastic volatility (SV) models using the implied volatility index of the KOSPI200 options (VKOSPI). The likelihood ratio tests reject the Heston and Hull–White SV models, whether or not they include jumps. Our estimation results advocate the unconstrained constant elasticity of variance (CEV) model with return jumps for describing the physical-measure dynamics of the spot index. The sub-period analysis shows that there was a significant increase in the size and frequency of jumps during the crisis period, when compared to those in the normal periods.

Suggested Citation

  • Kim, Jungmu & Park, Yuen Jung & Ryu, Doojin, 2018. "Testing CEV stochastic volatility models using implied volatility index data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 499(C), pages 224-232.
    • Handle: RePEc:eee:phsmap:v:499:y:2018:i:c:p:224-232
    DOI: 10.1016/j.physa.2018.02.001
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    Cited by:

    1. Doojin Ryu & Heejin Yang, 2018. "The directional information content of options volumes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1533-1548, December.
    2. Song, Wonho & Park, Sung Y. & Ryu, Doojin, 2018. "Dynamic conditional relationships between developed and emerging markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 507(C), pages 534-543.
    3. Gong, Xu & Lin, Boqiang, 2019. "Modeling stock market volatility using new HAR-type models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 516(C), pages 194-211.
    4. Chun, Dohyun & Cho, Hoon & Ryu, Doojin, 2019. "Forecasting the KOSPI200 spot volatility using various volatility measures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 514(C), pages 156-166.
    5. Daehyeon Park & Jiyeon Park & Doojin Ryu, 2020. "Volatility Spillovers between Equity and Green Bond Markets," Sustainability, MDPI, vol. 12(9), pages 1-12, May.

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    More about this item

    Keywords

    CEV model; Jump–diffusion process; Stochastic volatility; VKOSPI;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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