Asymptotic expansion for Barndorff-Nielsen and Shephard's stochastic volatility model

H. Masuda and N. Yoshida

Stochastic Processes and their Applications, 2005, vol. 115, issue 7, 1167-1186

Abstract: With the help of a general methodology of asymptotic expansions for mixing processes, we obtain the Edgeworth expansion for log-returns of a stock price process in Barndorff-Nielsen and Shephard's stochastic volatility model, in which the latent volatility process is described by a stationary non-Gaussian Ornstein-Uhlenbeck process (OU process) with invariant selfdecomposable distribution on . The present result enables us to simultaneously explain non-Gaussianity for short time-lags as well as approximate Gaussianity for long time-lags. The Malliavin calculus formulated by Bichteler, Gravereaux and Jacod for processes with jumps and the exponential mixing property of the OU process play substantial roles in order to ensure a conditional type Cramér condition under a certain truncation. Owing to several inherent properties of OU processes, the regularity conditions for the expansions can be verified without any difficulty, and the coefficients of the expansions up to any order can be explicitly computed.

Keywords: Edgeworth; expansion; Lévy; process; Mixing; Non-Gaussian; Ornstein-Uhlenbeck; process; Stochastic; volatility; model (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (7)

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