Inference in Infinite Superpositions of Non-Gaussian Ornstein--Uhlenbeck Processes Using Bayesian Nonparametic Methods

Jim Griffin

Journal of Financial Econometrics, 2011, vol. 9, issue 3, 519-549

Abstract: This paper describes a Bayesian nonparametric approach to volatility estimation. Volatility is assumed to follow a superposition of an infinite number of Ornstein--Uhlenbeck processes driven by a compound Poisson process with a parametric or nonparametric jump size distribution. This model allows a wide range of possible dependencies and marginal distributions for volatility. The properties of the model and prior specification are discussed, and a Markov chain Monte Carlo algorithm for inference is described. The model is fitted to daily returns of four indices: the Standard and Poors 500, the NASDAQ 100, the FTSE 100, and the Nikkei 225. (JEL: C11, C14, C22) Copyright The Author 2011. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2011
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