Comparison of the Korean and US Stock Markets Using Continuous-Time Stochastic Volatility Models

KDI Journal of Economic Policy 2018, 40(4):1–22

23 Pages Posted: 3 Jan 2019 Last revised: 8 Feb 2019

See all articles by Seungmoon Choi

Seungmoon Choi

School of Economics, University of Seoul

Date Written: November 30, 2018

Abstract

We estimate three continuous-time stochastic volatility models following the approach by Aït-Sahalia and Kimmel (2007) to compare the Korean and US stock markets. To do this, the Heston, GARCH, and CEV models are applied to the KOSPI 200 and S&P 500 Index. For the latent volatility variable, we generate and use the integrated volatility proxy using the implied volatility of short-dated at-the-money option prices. We conduct MLE in order to estimate the parameters of the stochastic volatility models. To do this we need the transition probability density function (TPDF), but the true TPDF is not available for any of the models in this paper. Therefore, the TPDFs are approximated using the irreducible method introduced in Aït-Sahalia (2008). Among three stochastic volatility models, the Heston model and the CEV model are found to be best for the Korean and US stock markets, respectively. There exist relatively strong leverage effects in both countries. Despite the fact that the long-run mean level of the integra ted volatility proxy (IV) was not statistically significant in either market, the speeds of the mean reversion parameters are statistically significant and meaningful in both markets. The IV is found to return to its long-run mean value more rapidly in Korea than in the US. All parameters related to the volatility function of the IV are statistically significant. Although the volatility of the IV is more elastic in the US stock market, the volatility itself is greater in Korea than in the US over the range of the observed IV.

Keywords: Continuous-time Stochastic Volatility Model, Integrated Volatility Proxy, Maximum Likelihood Estimation

JEL Classification: C22, C51, C58

Suggested Citation

Choi, Seungmoon, Comparison of the Korean and US Stock Markets Using Continuous-Time Stochastic Volatility Models (November 30, 2018). KDI Journal of Economic Policy 2018, 40(4):1–22, Available at SSRN: https://ssrn.com/abstract=3309401

Seungmoon Choi (Contact Author)

School of Economics, University of Seoul ( email )

Seoul, 130-743
Korea

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