A Stochastic Volatility Model with a General Leverage Specification
30 Pages Posted: 16 Aug 2020 Last revised: 16 Nov 2020
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: Suggested Citation