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Non-Stationary Stochastic Volatility Model for Dynamic Feedback and Skewness

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  • Mukhoti, Sujay

Abstract

In this paper I present a new single factor stochastic volatility model for asset return observed in discrete time and its latent volatility. This model unites the feedback effect and return skewness using a common factor for return and its volatility. Further, it generalizes the existing stochastic volatility framework with constant feedback to one with time varying feedback and as a consequence time varying skewness. However, presence of dynamic feedback effect violates the weak-stationarity assumption usually considered for the latent volatility process. The concept of bounded stationarity has been proposed in this paper to address the issue of non-stationarity. A characterization of the error distributions for returns and volatility is provided on the basis of existence of conditional moments. Finally, an application of the model has been explained using S&P100 daily returns under the assumption of Normal error and half Normal common factor distribution.

Suggested Citation

  • Mukhoti, Sujay, 2014. "Non-Stationary Stochastic Volatility Model for Dynamic Feedback and Skewness," MPRA Paper 62532, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62532
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    References listed on IDEAS

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    More about this item

    Keywords

    Stochastic volatility; Bounded stationarity; Leverage; Feedback; Skewness; Single factor model;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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