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Testing CEV stochastic volatility models using implied volatility index data

Jungmu Kim, Yuen Jung Park and Doojin Ryu

Physica A: Statistical Mechanics and its Applications, 2018, vol. 499, issue C, 224-232

Abstract: We test the goodness-of-fit of stochastic volatility (SV) models using the implied volatility index of the KOSPI200 options (VKOSPI). The likelihood ratio tests reject the Heston and Hull–White SV models, whether or not they include jumps. Our estimation results advocate the unconstrained constant elasticity of variance (CEV) model with return jumps for describing the physical-measure dynamics of the spot index. The sub-period analysis shows that there was a significant increase in the size and frequency of jumps during the crisis period, when compared to those in the normal periods.

Keywords: CEV model; Jump–diffusion process; Stochastic volatility; VKOSPI (search for similar items in EconPapers)
JEL-codes: C1 G12 G13 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:phsmap:v:499:y:2018:i:c:p:224-232