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Leverage and Feedback Effects on Multifactor Wishart Stochastic Volatility for Option Pricing

Listed author(s):
  • Manabu Asai

    (Faculty of Economics Soka University, Japan and Wharton School University of Pennsylvania)

  • Michael McAleer

    (Econometric Institute Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute, The Netherlands and Institute of Economic Research Kyoto University, Japan and Department of Quantitative Economics Complutense University of Madrid, Spain)

The paper proposes a general asymmetric multifactor Wishart stochastic volatility (AMWSV) di usion process which accommodates leverage, feedback e ects and mul- tifactor for the covariance process. The paper gives the closed-form solution for the conditional and unconditional Laplace transform of the AMWSV models. The paper also suggests estimating the AMWSV model by the generalized method of moments using information not only of stock prices but also of realized volatilities and co- volatilities. The empirical results for the bivariate data of the NASDAQ 100 and S&P 500 indices show that the general AMWSV model is preferred among several nested models.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP840.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 840.

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Length: 31pages
Date of creation: Jan 2013
Handle: RePEc:kyo:wpaper:840
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Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501

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