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Modelling stochastic volatility with leverage and jumps: a simulated maximum likelihood approach via particle filtering
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Malik, Sheheryar and Pitt, Michael K. (2009) Modelling stochastic volatility with leverage and jumps: a simulated maximum likelihood approach via particle filtering. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.897).
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
In this paper we provide a unified methodology in order to conduct likelihood-based inference on the unknown parameters of a general class of discrete-time stochastic volatility models, characterized by both a leverage effect and jumps in returns. Given the non-linear/non-Gaussian state-space form, approximating the likelihood for the parameters is conducted with output generated by the particle filter. Methods are employed to ensure that the approximating likelihood is continuous as a function of the unknown parameters thus enabling the use of Newton-Raphson type maximization algorithms. Our approach is robust and efficient relative to alternative Markov Chain Monte Carlo schemes employed in such contexts. In addition it provides a feasible basis for undertaking the non-trivial task of model comparison. The technique is applied to daily returns data for various stock price indices. We find strong evidence in favour of a leverage effect in all cases. Jumps are an important component in two out of the four series we consider.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Financial leverage, Jump processes, Stochastic processes, Markov processes, Monte Carlo method, Stock price indexes | ||||
Series Name: | Warwick economic research papers | ||||
Publisher: | University of Warwick, Department of Economics | ||||
Place of Publication: | Coventry | ||||
Official Date: | 3 April 2009 | ||||
Dates: |
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Number: | No.897 | ||||
Number of Pages: | 29 | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) |
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