Stochastic Volatility with Heterogeneous Time Scales

21 Pages Posted: 31 May 2012 Last revised: 3 Apr 2013

See all articles by Danilo Delpini

Danilo Delpini

Università degli Studi di Sassari - Department of Economics and Business

Giacomo Bormetti

University of Bologna - Department of Mathematics

Date Written: May 31, 2012

Abstract

Agents' heterogeneity is recognized as a driver mechanism for the persistence of financial volatility. We focus on the multiplicity of investment strategies' horizons, we embed this concept in a continuous time stochastic volatility framework and prove that a parsimonious, two-scale version effectively captures the long memory as measured from the real data. Since estimating parameters in a stochastic volatility model is challenging, we introduce a robust methodology based on the Generalized Method of Moments supported by a heuristic selection of the orthogonal conditions. In addition to the volatility clustering, the estimated model also captures other relevant stylized facts, emerging as a minimal but realistic and complete framework for modelling financial time series.

Keywords: Continuous Time Stochastic Volatility, Long Memory, Generalized Methods of Moments

JEL Classification: C32, C50

Suggested Citation

Delpini, Danilo and Bormetti, Giacomo, Stochastic Volatility with Heterogeneous Time Scales (May 31, 2012). Available at SSRN: https://ssrn.com/abstract=2071400 or http://dx.doi.org/10.2139/ssrn.2071400

Danilo Delpini

Università degli Studi di Sassari - Department of Economics and Business ( email )

via Muroni 25
Sassari, Sassari 07100
Italy

Giacomo Bormetti (Contact Author)

University of Bologna - Department of Mathematics ( email )

Piazza di Porta S. Donato , 5
Bologna, Bologna 40126
Italy

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