EconPapers    
Economics at your fingertips  
 

A Threshold Stochastic Volatility Model with Realized Volatility

Dinghai Xu

No 1003, Working Papers from University of Waterloo, Department of Economics

Abstract: Rapid development in the computer technology has made the financial transaction data visible at an ultimate limit level. The realized volatility, as a proxy for the "true" volatility, can be constructed using the high frequency data. This paper extends a threshold stochastic volatility specification proposed in So, Li and Lam (2002) by incorporating the high frequency volatility measures. Due to the availability of the volatility time series, the parameters estimation can be easily implemented via the standard maximum likelihood estimation (MLE) rather than using the simulated Bayesian methods. In the Monte Carlo section, several mis-specification and sensitivity experiments are conducted. The proposed methodology shows good performance according to the Monte Carlo results. In the empirical study, three stock indices are examined under the threshold stochastic volatility structure. Empirical results show that in different regimes, the returns and volatilities exhibit asymmetric behavior. In addition, this paper allows the threshold in the model to be flexible and uses a sequential optimization based on MLE to search for the "optimal" threshold value. We find that the model with a flexible threshold is always preferred to the model with a fixed threshold according to the log-likelihood measure. Interestingly, the "optimal" threshold is found to be stable across different sampling realized volatility measures.

JEL-codes: C01 C51 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-05, Revised 2010-05
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://economics.uwaterloo.ca/documents/10-003DX.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

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:wat:wpaper:1003

Access Statistics for this paper

More papers in Working Papers from University of Waterloo, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sherri Anne Arsenault ().

 
Page updated 2020-11-26
Handle: RePEc:wat:wpaper:1003