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Stochastic Volatility Driven by Large Shocks

Author

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  • George Kapetanios

    (Queen Mary, University of London)

  • Elias Tzavalis

    (Queen Mary, University of London)

Abstract

This paper presents a new model of stochastic volatility which allows for infrequent shifts in the mean of volatility, known as structural breaks. These are endogenously driven from large innovations in stock returns arriving in the market. The model has a number of interesting properties. Among them, it can allow for shifts in volatility which are of stochastic timing and magnitude. This model can be used to distinguish permanent shifts in volatility coming from large pieces of news arriving in the market, from ordinary volatility shocks.

Suggested Citation

  • George Kapetanios & Elias Tzavalis, 2006. "Stochastic Volatility Driven by Large Shocks," Working Papers 568, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:568
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2006/items/wp568.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kapetanios, George, 2009. "Testing for strict stationarity in financial variables," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2346-2362, December.

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    More about this item

    Keywords

    Stochastic volatility; Structural breaks;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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