Sequential bayesian learning for stochastic volatility with variance-gamma jumps in returns

Samir P. Warty, Hedibert F. Lopes and Nicholas G. Polson

No 202, Business and Economics Working Papers from Unidade de Negocios e Economia, Insper

Abstract: In this work, we investigate sequential Bayesian estimation for inference of stochastic volatility with variance-gamma jumps in returns (SVVG). We develop an estimation algorithm that adapts the sequential learning auxiliary particle filter proposed by Carvalho, Johannes, Lopes, and Polson (2010) to SVVG. Simulation evidence and empirical estimation results indicate that this approach is able to filter latent variances, identify latent jumps in returns, and provide sequential learning about the static parameters of SVVG. We demonstrate comparative performance of the sequential algorithm and offline Markov Chain Monte Carlo in synthetic and real data applications.

Pages: 36 pages
Date: 2014
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