Volatility dynamics for the S&P 500: Further evidence from non-affine, multi-factor jump diffusions
Andreas Kaeck and
Carol Alexander ()
Journal of Banking & Finance, 2012, vol. 36, issue 11, 3110-3121
We apply Markov chain Monte Carlo methods to time series data on S&P 500 index returns, and to its option prices via a term structure of VIX indices, to estimate 18 different affine and non-affine stochastic volatility models with one or two variance factors, and where jumps are allowed in both the price and the instantaneous volatility. The in-sample fit to the VIX term structure shows that the second (stochastic long-term volatility) factor is required to fit the VIX term structure. Out-of-sample tests on the fit to individual option prices, as well as in-sample tests, show that the inclusion of jumps is less important than allowing for non-affine dynamics. The estimation and testing periods together cover more than 21 years of daily data.
Keywords: Gibbs sampler; Instantaneous volatility dynamics; MCMC; Particle filter; S&P 500 options; VIX (search for similar items in EconPapers)
JEL-codes: G13 C13 C63 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:11:p:3110-3121
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