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On leverage in a stochastic volatility model

Author

Listed:
  • Jun Yu

Abstract

This paper is concerned with specification for modelling financial leverage effect in the context of stochastic volatility (SV) models. Two alternative specifications co-exist in the literature. One is the Euler approximation to the well known continuous time SV model with leverage effect and the other is the discrete time SV model of Jacquier, Polson and Rossi (2004, Journal of Econometrics, forthcoming). Using a Gaussian nonlinear state space form with uncorrelated measurement and transition errors, I show that it is easy to interpret the leverage effect in the conventional model whereas it is not clear how to obtain the leverage effect in the model of Jacquier et al. Empirical comparisons of these two models via Bayesian Markov chain Monte Carlo (MCMC) methods reveal that the specification of Jacquier et al is inferior. Simulation experiments are conducted to study the sampling properties of the Bayes MCMC for the conventional model

Suggested Citation

  • Jun Yu, 2004. "On leverage in a stochastic volatility model," Econometric Society 2004 Far Eastern Meetings 497, Econometric Society.
    • Handle: RePEc:ecm:feam04:497
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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