The role of stochastic volatility and return jumps: reproducing volatility and higher moments in the KOSPI 200 returns dynamics

The role of stochastic volatility and return jumps: reproducing volatility and higher moments in... This paper investigates the role of stochastic volatility and return jumps in reproducing the volatility dynamics and the shape characteristics of the Korean Composite Stock Price Index (KOSPI) 200 returns distribution. Using efficient method of moments and reprojection analysis, we find that stochastic volatility models, both with and without return jumps, capture return dynamics surprisingly well. The stochastic volatility model without return jumps, however, cannot fully reproduce the conditional kurtosis implied by the data. Return jumps successfully complement this gap. We also find that return jumps are essential in capturing the volatility smirk effects observed in short-term options. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The role of stochastic volatility and return jumps: reproducing volatility and higher moments in the KOSPI 200 returns dynamics

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Publisher
Springer Journals
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-007-0022-2
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the role of stochastic volatility and return jumps in reproducing the volatility dynamics and the shape characteristics of the Korean Composite Stock Price Index (KOSPI) 200 returns distribution. Using efficient method of moments and reprojection analysis, we find that stochastic volatility models, both with and without return jumps, capture return dynamics surprisingly well. The stochastic volatility model without return jumps, however, cannot fully reproduce the conditional kurtosis implied by the data. Return jumps successfully complement this gap. We also find that return jumps are essential in capturing the volatility smirk effects observed in short-term options.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jun 5, 2007

References

  • Evaluating effects of excess kurtosis on VaR estimates: Evidence for international stock indices
    Baixauli, J. S.; Alvarez, S.
  • Jump and stochastic volatility: Exchange rate processes implicit in deutsche mark options
    Bates, D.
  • Spectral GMM estimation of continuous-time processes
    Chacko, G.; Viceira, L. M.
  • Alternative models for stock price dynamics
    Chernov, M.; Gallant, A. R.; Ghysels, E.; Tauchen, G.
  • Towards a unified approach to the joint estimation of objective and risk neutral measures for the purpose of options valuation
    Chernov, M.; Ghysels, E.
  • An MCMC approach to classical estimation
    Chernozhukov, V.; Hong, H.
  • Do stock prices and volatility jump? Reconciling evidence from spot and option prices
    Eraker, B.
  • Estimation of stochastic volatility models with diagnostics
    Gallant, A. R.; Hsieh, D. A.; Tauchen, G.

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