A Stochastic Volatility Model with a General Leverage Specification

30 Pages Posted: 16 Aug 2020 Last revised: 16 Nov 2020

See all articles by Leopoldo Catania

Leopoldo Catania

Aarhus University - School of Business and Social Sciences; Aarhus University - CREATES

Date Written: July 15, 2020

Abstract

We introduce a new Stochastic Volatility model that postulates a general correlation structure between the shocks of the measurement and log volatility equations at different temporal lags. The resulting specification is able to better characterize the leverage effect and propagation in financial time series. Furthermore, it nests other asymmetric volatility models and can be used for testing and diagnostics. We derive the SML and QML estimators and investigate their finite sample performance in a simulation study. An empirical illustration shows that the postulated correlation structure improves the fit of the leverage propagation and leads to more precise volatility predictions.

Keywords: Asymmetric Stochastic Volatility, Leverage Effect, Volatility Prediction

JEL Classification: C22, C51, C58

Suggested Citation

Catania, Leopoldo, A Stochastic Volatility Model with a General Leverage Specification (July 15, 2020). Available at SSRN: https://ssrn.com/abstract=3642613 or http://dx.doi.org/10.2139/ssrn.3642613

Leopoldo Catania (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark
+4587165536 (Phone)

HOME PAGE: http://pure.au.dk/portal/en/leopoldo.catania@econ.au.dk

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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