The persistent nature of equity volatility is investigated by means of a multi-factor stochastic volatility model with time varying parameters. The parameters are estimated by means of a sequential matching procedure which adopts as an auxiliary model a time-varying generalization of the HAR model for the realized volatility series. It emerges that during the recent financial crisis the relative weight of the daily component dominates over the monthly term. The estimates of the two factor stochastic volatility model suggest that the change in the dynamic structure of the realized volatility during the financial crisis is due to the increase in the volatility of the persistent volatility term. A set of Monte Carlo simulations highlights the robustness of the methodology adopted in tracking the dynamics of the parameters.

It's all about volatility of volatility: evidence from a two-factor stochastic volatility model / Grassi, Stefano; Santucci De Magistris, Paolo. - In: JOURNAL OF EMPIRICAL FINANCE. - ISSN 0927-5398. - 30:(2015), pp. 62-78. [10.1016/j.jempfin.2014.11.007]

It's all about volatility of volatility: evidence from a two-factor stochastic volatility model

GRASSI, STEFANO;Santucci de Magistris, Paolo
2015

Abstract

The persistent nature of equity volatility is investigated by means of a multi-factor stochastic volatility model with time varying parameters. The parameters are estimated by means of a sequential matching procedure which adopts as an auxiliary model a time-varying generalization of the HAR model for the realized volatility series. It emerges that during the recent financial crisis the relative weight of the daily component dominates over the monthly term. The estimates of the two factor stochastic volatility model suggest that the change in the dynamic structure of the realized volatility during the financial crisis is due to the increase in the volatility of the persistent volatility term. A set of Monte Carlo simulations highlights the robustness of the methodology adopted in tracking the dynamics of the parameters.
Time-varying parametersOn-line Kalman filterSimulation-based inferencePredictive likelihoodVolatility factors
It's all about volatility of volatility: evidence from a two-factor stochastic volatility model / Grassi, Stefano; Santucci De Magistris, Paolo. - In: JOURNAL OF EMPIRICAL FINANCE. - ISSN 0927-5398. - 30:(2015), pp. 62-78. [10.1016/j.jempfin.2014.11.007]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/178219
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