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It’s all about volatility (of volatility): evidence from a two-factor stochastic volatility model

  • Stefano Grassi

    ()

    (Aarhus University and CREATES)

  • Paolo Santucci de Magistris

    ()

    (Aarhus University and CREATES)

The persistent nature of equity volatility is investigated by means of a multi-factor stochastic volatility model with time varying parameters. The parameters are estimated by means of a sequential indirect inference procedure which adopts as auxiliary model a time-varying generalization of the HAR model for the realized volatility series. It emerges that during the recent financial crisis the relative weight of the daily component dominates over the monthly term. The estimates of the two factor stochastic volatility model suggest that the change in the dynamic structure of the realized volatility during the financial crisis is due to the increase in the volatility of the persistent volatility term. As a consequence of the dynamics in the stochastic volatility parameters, the shape and curvature of the volatility smile evolve trough time.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-03.

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Length: 42
Date of creation: 02 2013
Date of revision:
Handle: RePEc:aah:create:2013-03
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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