Improving the Asymmetric Stochastic Volatility Model with Ex-post Volatility: The Identification of the Asymmetry

63 Pages Posted: 25 Mar 2020 Last revised: 7 Oct 2022

See all articles by Zehua Zhang

Zehua Zhang

Hunan University

Ran Zhao

Claremont Graduate University, Drucker School of Management

Date Written: October 1, 2022

Abstract

Simulation studies prove that the asymmetry stochastic volatility (ASV) models may infer erroneous correlation coefficients, due to their predetermined return-volatility specification. We propose identifying the correlation parameter by incorporating the ex-post volatility in the ASV framework. We obtain a significantly smaller magnitude in the estimated correlation coefficients between equity and volatility processes among major U.S. equity market indexes. Out-of-sample index return distribution forecasts demonstrate superior performance when jointly estimating the return and the ex-post volatility processes. The corrected return-volatility correlations by estimating proposed ASV models with subsample data further document the time-varying leverage effect.

Keywords: Asymmetric Stochastic Volatility, Leverage Effect, Bayesian MCMC, Realized Volatility, Bipower Variation

JEL Classification: C11, C15, C22, C52

Suggested Citation

Zhang, Zehua and Zhao, Ran, Improving the Asymmetric Stochastic Volatility Model with Ex-post Volatility: The Identification of the Asymmetry (October 1, 2022). Available at SSRN: https://ssrn.com/abstract=3546135 or http://dx.doi.org/10.2139/ssrn.3546135

Zehua Zhang (Contact Author)

Hunan University ( email )

Lushan Road, Yuelu District
Changsha, Hunan
China

Ran Zhao

Claremont Graduate University, Drucker School of Management ( email )

150 E. Tenth Street
Claremont, CA 91711
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
65
Abstract Views
546
Rank
540,784
PlumX Metrics