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Stochastic volatility jump-diffusions for European equity index dynamics

journal contribution
posted on 2023-06-08, 12:23 authored by Andreas KaeckAndreas Kaeck, Carol AlexanderCarol Alexander
This paper examines the ability of twelve different continuous-time two-factor models with mean-reverting stochastic volatility to capture the dynamics of the S&P 500 and three European equity indices. The stochastic volatility models are the square root variance, GARCH, and log volatility diffusions, and each is augmented with price and volatility jump extensions. Parameter estimation is by Markov Chain Monte Carlo using daily spot index returns from 1987 to 2010. For each index we find that GARCH diffusions augmented with correlated price and volatility jumps outperform other specifications with respect to all the tests we perform. The European indices have similar dynamics, which are relatively easy to capture using several of our specifications, but the S&P 500 index has different dynamics and here the GARCH-jump specification is very clearly superior.

History

Publication status

  • Published

Journal

European Financial Management

ISSN

1354-7798

Publisher

Blackwell Publishing

Issue

3

Volume

19

Page range

470-496

Department affiliated with

  • Business and Management Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2013-08-02

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