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Bayesian inference with stochastic volatility models using continuous superpositions of non-Gaussian Ornstein-Uhlenbeck processes

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  • Griffin, Jim
  • Steel, Mark F.J.

Abstract

This paper discusses Bayesian inference for stochastic volatility models based on continuous superpositions of Ornstein-Uhlenbeck processes. These processes represent an alternative to the previously considered discrete superpositions. An interesting class of continuous superpositions is defined by a Gamma mixing distribution which can define long memory processes. We develop efficient Markov chain Monte Carlo methods which allow the estimation of such models with leverage effects. This model is compared with a two-component superposition on the daily Standard and Poor's 500 index from 1980 to 2000.

Suggested Citation

  • Griffin, Jim & Steel, Mark F.J., 2008. "Bayesian inference with stochastic volatility models using continuous superpositions of non-Gaussian Ornstein-Uhlenbeck processes," MPRA Paper 11071, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:11071
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    References listed on IDEAS

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    1. Bjørn Eraker & Michael Johannes & Nicholas Polson, 2003. "The Impact of Jumps in Volatility and Returns," Journal of Finance, American Finance Association, vol. 58(3), pages 1269-1300, June.
    2. S. P. Brooks & P. Giudici & G. O. Roberts, 2003. "Efficient construction of reversible jump Markov chain Monte Carlo proposal distributions," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 65(1), pages 3-39, January.
    3. Josep Perello & Jaume Masoliver & Jean-Philippe Bouchaud, 2004. "Multiple time scales in volatility and leverage correlations: a stochastic volatility model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 11(1), pages 27-50.
    4. Gareth O. Roberts & Omiros Papaspiliopoulos & Petros Dellaportas, 2004. "Bayesian inference for non‐Gaussian Ornstein–Uhlenbeck stochastic volatility processes," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 66(2), pages 369-393, May.
    5. Elisa Nicolato & Emmanouil Venardos, 2003. "Option Pricing in Stochastic Volatility Models of the Ornstein‐Uhlenbeck type," Mathematical Finance, Wiley Blackwell, vol. 13(4), pages 445-466, October.
    6. Griffin, J.E. & Steel, M.F.J., 2006. "Inference with non-Gaussian Ornstein-Uhlenbeck processes for stochastic volatility," Journal of Econometrics, Elsevier, vol. 134(2), pages 605-644, October.
    7. Creal, Drew D., 2008. "Analysis of filtering and smoothing algorithms for Lévy-driven stochastic volatility models," Computational Statistics & Data Analysis, Elsevier, vol. 52(6), pages 2863-2876, February.
    8. Ole E. Barndorff‐Nielsen & Neil Shephard, 2001. "Non‐Gaussian Ornstein–Uhlenbeck‐based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
    9. Sylvia Frühwirth-Schnatter & Leopold Sögner, 2009. "Bayesian estimation of stochastic volatility models based on OU processes with marginal Gamma law," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 61(1), pages 159-179, March.
    10. Matthew P. S. Gander & David A. Stephens, 2007. "Simulation and inference for stochastic volatility models driven by Lévy processes," Biometrika, Biometrika Trust, vol. 94(3), pages 627-646.
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    Citations

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    Cited by:

    1. Taufer, Emanuele & Leonenko, Nikolai & Bee, Marco, 2011. "Characteristic function estimation of Ornstein-Uhlenbeck-based stochastic volatility models," Computational Statistics & Data Analysis, Elsevier, vol. 55(8), pages 2525-2539, August.
    2. Zhongxian Men & Tony S. Wirjanto & Adam W. Kolkiewicz, 2016. "A Multiscale Stochastic Conditional Duration Model," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(04), pages 1-28, December.
    3. Anzarut, Michelle & Mena, Ramsés H., 2019. "A Harris process to model stochastic volatility," Econometrics and Statistics, Elsevier, vol. 10(C), pages 151-169.
    4. Raknerud, Arvid & Skare, Øivind, 2012. "Indirect inference methods for stochastic volatility models based on non-Gaussian Ornstein–Uhlenbeck processes," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3260-3275.
    5. Piotr Szczepocki, 2020. "Application of iterated filtering to stochastic volatility models based on non-Gaussian Ornstein-Uhlenbeck process," Statistics in Transition New Series, Polish Statistical Association, vol. 21(2), pages 173-187, June.
    6. Behme, Anita & Chong, Carsten & Klüppelberg, Claudia, 2015. "Superposition of COGARCH processes," Stochastic Processes and their Applications, Elsevier, vol. 125(4), pages 1426-1469.

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    More about this item

    Keywords

    Leverage effect; Levy process; Long memory; Markov chain Monte Carlo; Stock price;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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