Maximum likelihood estimation of non-affine volatility processes

Kyriakos Chourdakis and George Dotsis

Journal of Empirical Finance, 2011, vol. 18, issue 3, 533-545

Abstract: In this paper we develop a new estimation method for extracting non-affine latent stochastic volatility and risk premia from measures of model-free realized and risk-neutral integrated volatility. We estimate non-affine models with nonlinear drift and constant elasticity of variance and we compare them to the popular square-root stochastic volatility model. Our empirical findings are: (1) the square-root model is misspecified; (2) the inclusion of constant elasticity of variance and nonlinear drift captures stylized facts of volatility dynamics and (3) the square-root stochastic volatility model is explosive under the risk-neutral probability measure.

Keywords: Non-affine; volatility; Integrated; volatility; Volatility; risk; premium; Markov; chain; approximation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:18:y:2011:i:3:p:533-545

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