A Class of Nonlinear Stochastic Volatility Models

Jun Yu and Zhenlin Yang

No 203, Working Papers from Department of Economics, The University of Auckland

Abstract: This paper proposes a class of stochastic volatility (SV) models which offers an alternative to the one introduced in Andersen (1994). The class encompasses all standard SV models that have appeared in the literature, including the well known lognormal model, and allows us to empirically test all standard specifications in a convenient way. We develop a likelihood-based technique for analyzing the class. Daily dollar/pound exchange rate data reject all the standard models and suggest evidence of nonlinear SV. An efficient algorithm is proposed to study the implications of this nonlinear SV on pricing currency options and it is found that the lognormal model overprices options.

Keywords: Economics (search for similar items in EconPapers)
Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://hdl.handle.net/2292/203

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:auc:wpaper:203

Access Statistics for this paper

More papers in Working Papers from Department of Economics, The University of Auckland Contact information at EDIRC.
Bibliographic data for series maintained by Library Digital Development ().