Multiscale Stochastic Volatility Model with Heavy Tails and Leverage Effects

Posted: 2 Sep 2014

See all articles by Tony S. Wirjanto

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Zhongxian Men

Independent

Adam Kolkiewicz

Independent

Date Written: September 1, 2014

Abstract

This paper extends the multiscale stochastic volatility (MSSV) models to allow for heavy tails of the marginal distribution of the asset returns and correlation between the innovation of the mean equation and the innovations of the latent factor processes. Novel algorithms of Markov Chain Monte Carlo (MCMC) are developed to estimate parameters of these models. Results of simulation studies suggest that our proposed models and corresponding estimation methodology perform quite well. We also apply an auxiliary particle filter technique to construct one-step-ahead in-sample and out-of-sample volatility forecasts of the fitted models. In addition the models and MCMC methods are applied to data sets of asset returns from both foreign currency and equity markets.

Keywords: Stochastic Volatility; Bayesian Inference; Markov Chain Monte Carlo; Leverage Effect; Acceptance-rejection; Slice Sampler.

JEL Classification: C10; C41; G10

Suggested Citation

Wirjanto, Tony S. and Men, Zhongxian and Kolkiewicz, Adam, Multiscale Stochastic Volatility Model with Heavy Tails and Leverage Effects (September 1, 2014). Available at SSRN: https://ssrn.com/abstract=2490029

Tony S. Wirjanto (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

Zhongxian Men

Independent ( email )

Adam Kolkiewicz

Independent ( email )

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