IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1204.3556.html
   My bibliography  Save this paper

Maximum likelihood approach for several stochastic volatility models

Author

Listed:
  • Jordi Camprodon
  • Josep Perell'o

Abstract

Volatility measures the amplitude of price fluctuations. Despite it is one of the most important quantities in finance, volatility is not directly observable. Here we apply a maximum likelihood method which assumes that price and volatility follow a two-dimensional diffusion process where volatility is the stochastic diffusion coefficient of the log-price dynamics. We apply this method to the simplest versions of the expOU, the OU and the Heston stochastic volatility models and we study their performance in terms of the log-price probability, the volatility probability, and its Mean First-Passage Time. The approach has some predictive power on the future returns amplitude by only knowing current volatility. The assumed models do not consider long-range volatility auto-correlation and the asymmetric return-volatility cross-correlation but the method still arises very naturally these two important stylized facts. We apply the method to different market indexes and with a good performance in all cases.

Suggested Citation

  • Jordi Camprodon & Josep Perell'o, 2012. "Maximum likelihood approach for several stochastic volatility models," Papers 1204.3556, arXiv.org, revised Jul 2012.
  • Handle: RePEc:arx:papers:1204.3556
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1204.3556
    File Function: Latest version
    Download Restriction: no
    ---><---

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1204.3556. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.