It’s all about volatility (of volatility): evidence from a two-factor stochastic volatility model

Stefano Grassi () and Paolo Santucci de Magistris ()
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Paolo Santucci de Magistris: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: The persistent nature of equity volatility is investigated by means of a multi-factor stochastic volatility model with time varying parameters. The parameters are estimated by means of a sequential indirect inference procedure which adopts as auxiliary model a time-varying generalization of the HAR model for the realized volatility series. It emerges that during the recent financial crisis the relative weight of the daily component dominates over the monthly term. The estimates of the two factor stochastic volatility model suggest that the change in the dynamic structure of the realized volatility during the financial crisis is due to the increase in the volatility of the persistent volatility term. As a consequence of the dynamics in the stochastic volatility parameters, the shape and curvature of the volatility smile evolve trough time.

Keywords: Time-Varying Parameters; On-line Kalman Filter; Simulation-based inference; Predictive Likelihood; Volatility Factors (search for similar items in EconPapers)
JEL-codes: C00 C11 C58 G01 (search for similar items in EconPapers)
Pages: 42
Date: 2013
New Economics Papers: this item is included in nep-cwa, nep-ecm, nep-ets, nep-for and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Journal Article: It's all about volatility of volatility: Evidence from a two-factor stochastic volatility model (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2013-03

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