Stochastic Volatility Driven by Large Shocks

George Kapetanios and Elias Tzavalis

No 568, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: This paper presents a new model of stochastic volatility which allows for infrequent shifts in the mean of volatility, known as structural breaks. These are endogenously driven from large innovations in stock returns arriving in the market. The model has a number of interesting properties. Among them, it can allow for shifts in volatility which are of stochastic timing and magnitude. This model can be used to distinguish permanent shifts in volatility coming from large pieces of news arriving in the market, from ordinary volatility shocks.

Keywords: Stochastic volatility; Structural breaks (search for similar items in EconPapers)
JEL-codes: C15 C22 (search for similar items in EconPapers)
Date: 2006-09-01
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:568

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