On Leverage in a Stochastic Volatility Model

Jun Yu

No 13-2004, Working Papers from Singapore Management University, School of Economics

Abstract: This paper is concerned with specification for modelling financial leverage effect in the context of stochastic volatility (SV) models. Two alternative specifications coexist in the literature. One is the Euler approximation to the well known continuous time SV model with leverage effect and the other is the discrete time SV model of Jacquier, Polson and Rossi (2004, Journal of Econometrics, forthcoming). Using a Gaussian nonlinear state space form with uncorrelated measurement and transition errors, I show that it is easy to interpret the leverage effect in the conventional model whereas it is not clear how to obtain the leverage effect in the model of Jacquier et al. Empirical comparisons of these two models via Bayesian Markov chain Monte Carlo (MCMC) methods reveal that the specification of Jacquier et al is inferior. Simulation experiments are conducted to study the sampling properties of the Bayes MCMC for the conventional model. the appropriateness of statistical arbitrage as a test of marketefficiency.

Keywords: Bayes factors; Leverage effect; Markov chain Monte Carlo; Nonlinear state space models; Quasi maximum likelihood. (search for similar items in EconPapers)
JEL-codes: C11 C15 G12 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2004-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in SMU Economics and Statistics Working Paper Series

Downloads: (external link)
https://mercury.smu.edu.sg/rsrchpubupload/1917/jprcom4.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Server closed connection without sending any data back

Related works:
Journal Article: On leverage in a stochastic volatility model (2005)
Working Paper: On leverage in a stochastic volatility model (2004)
Working Paper: On Leverage in a Stochastic Volatility Model (2004)
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:siu:wpaper:13-2004

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Singapore Management University, School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by QL THor ().