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
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)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:6:y:2018:i:2:p:46-:d:143022
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