Multiple Time Scales and the Exponential Ornstein-Uhlenbeck Stochastic Volatility Model

24 Pages Posted: 26 Jan 2005

See all articles by Jaume Masoliver

Jaume Masoliver

University of Barcelona - Department of Physics

Josep Perelló

University of Barcelona - Department of Physics

Date Written: January 26, 2005

Abstract

We study the exponential Ornstein-Uhlenbeck stochastic volatility model and observe that the model shows a multiscale behavior in the volatility autocorrelation. It also exhibits a leverage correlation and a probability profile for the stationary volatility which are consistent with market observations. All these features make the model quite appealing since it appears to be more complete than other stochastic volatility models also based on a two-dimensional diffusion. We finally present an approximate solution for the return probability density designed to capture the kurtosis and skewness effects.

Keywords: Stochastic volatility model, long memory, volatility autocorrelation

Suggested Citation

Masoliver, Jaume and Perello, Josep, Multiple Time Scales and the Exponential Ornstein-Uhlenbeck Stochastic Volatility Model (January 26, 2005). Available at SSRN: https://ssrn.com/abstract=654521 or http://dx.doi.org/10.2139/ssrn.654521

Jaume Masoliver

University of Barcelona - Department of Physics ( email )

Barcelona, E-08028
Spain
00 34 3 402 11 59 (Phone)
00 34 3 402 11 49 (Fax)

Josep Perello (Contact Author)

University of Barcelona - Department of Physics ( email )

Diagonal, 647
Barcelona, E-08028
Spain
+34 9 34021150 (Phone)
+34 34021149 (Fax)

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