Volatility, Jumps, and Predictability of Returns: A Sequential Analysis

Davide Raggi and Silvano Bordignon

Econometric Reviews, 2011, vol. 30, issue 6, 669-695

Abstract: In this article we propose a Monte Carlo algorithm for sequential parameter learning for a stochastic volatility model with leverage, nonconstant conditional mean and jumps. We are interested in estimating the time invariant parameters and the nonobservable dynamics involved in the model. Our simple but effective idea relies on the auxiliary particle filter algorithm mixed together with the Markov Chain Monte Carlo (MCMC) methodology. Adding an MCMC step to the auxiliary particle filter prevents numerical degeneracies in the sequential algorithm and allows sequential evaluation of the fixed parameters and the latent processes. Empirical evaluation on simulated and real data is presented to assess the performance of the algorithm. A numerical comparison with a full MCMC procedure is also provided. We also extend our methodology to superposition models in which volatility is obtained by a linear combination of independent processes.

Keywords: Auxiliary particle filters; Bayesian estimation; Leverage; MCMC; Return's predictability; Stochastic volatility with jumps (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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Working Paper: Volatility, Jumps and Predictability of Returns: a Sequential Analysis (2008)
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DOI: 10.1080/07474938.2011.553570

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