Non-Stationary Stochastic Volatility Model for Dynamic Feedback and Skewness

Sujay Mukhoti

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper I present a new single factor stochastic volatility model for asset return observed in discrete time and its latent volatility. This model unites the feedback effect and return skewness using a common factor for return and its volatility. Further, it generalizes the existing stochastic volatility framework with constant feedback to one with time varying feedback and as a consequence time varying skewness. However, presence of dynamic feedback effect violates the weak-stationarity assumption usually considered for the latent volatility process. The concept of bounded stationarity has been proposed in this paper to address the issue of non-stationarity. A characterization of the error distributions for returns and volatility is provided on the basis of existence of conditional moments. Finally, an application of the model has been explained using S&P100 daily returns under the assumption of Normal error and half Normal common factor distribution.

Keywords: Stochastic volatility; Bounded stationarity; Leverage; Feedback; Skewness; Single factor model (search for similar items in EconPapers)
JEL-codes: C11 C58 (search for similar items in EconPapers)
Date: 2014-06-28
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:62532

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