Extracting Stochastic Volatilities and Jumps for the Korean Stock Index Using Optimal Filter (in Korean)

Jaeho Yun ()
Additional contact information
Jaeho Yun: The Bank of Korea

Economic Analysis (Quarterly), 2010, vol. 16, issue 3, 78-118

Abstract: In this paper, by using the optimal filtering method proposed by Johannes et al. (2009), we extract stochastic volatilities and jumps for the KOSPI (Korea Composite Stock Price Index), and assess whether this extraction can give information to forecast future stock index volatility. First, we evaluate density forecast performances for a variety of stock return models, such as various GARCH and square-root stochastic volatility models, via the non-parametric specification testing method developed by Hong and Li (2005) and Yun and Hong (2009). Our results show that the stochastic volatility model with a jump-in-return (SVJ model) exhibits better performance than popularly used GARCH models. Second, we extract stochastic volatilities and jumps from our SVJ model, which showed the best density forecasting performance by using optimal filter. By observing the extracted stochastic volatilities and jumps, we find that the stock index collapse following the 9/11 attacks was due to a downward jump of the stock index, whereas the stock market turbulence right after the Lehman Brothers failure was due mainly to high and persistent stochastic volatility. This implies a longer persistence of stock market uncertainty following the global financial crisis than the 9/11 attacks. Our empirical study shows that the optimal filtering method can be a useful method, by which we can extract stochastic volatilities and jumps and forecast future stock volatilities in a timely manner.

Keywords: Stochastic volatility; Jump; Square-root stochastic volatility model; GARCH model; Optimal filter; Non-parametric specification testing (search for similar items in EconPapers)
JEL-codes: C1 C5 G1 (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations:

Downloads: (external link)
http://imer.bok.or.kr/attach/imer_kor/2545/2013/12/1386556261127.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bok:journl:v:16:y:2010:i:3:p:78-118

Access Statistics for this article

Economic Analysis (Quarterly) is currently edited by Wook Sohn, Hwan-koo Kang and Jaerang Lee

More articles in Economic Analysis (Quarterly) from Economic Research Institute, Bank of Korea Contact information at EDIRC.
Bibliographic data for series maintained by Economic Research Institute ().