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Volatility Is Log-Normal—But Not for the Reason You Think

Martin Tegnér () and Rolf Poulsen ()
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Martin Tegnér: Department of Engineering & Oxford-Man Institute of Quantitative Finance, University of Oxford, Oxford OX1 3PJ, UK
Rolf Poulsen: Department of Mathematical Sciences, University of Copenhagen, 2100 København Ø, Denmark

Risks, 2018, vol. 6, issue 2, 1-16

Abstract: It is impossible to discriminate between the commonly used stochastic volatility models of Heston, log-normal, and 3-over-2 on the basis of exponentially weighted averages of daily returns—even though it appears so at first sight. However, with a 5-min sampling frequency, the models can be differentiated and empirical evidence overwhelmingly favours a fast mean-reverting log-normal model.

Keywords: volatility; estimation; Heston; log-normal; 3-over-2; fast mean-reversion (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 M2 M4 K2 (search for similar items in EconPapers)
Date: 2018
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