Volatility dynamics for the S&P 500: further evidence from non-affine, multi-factor jump diffusions

Kaeck, Andreas and Alexander, Carol (2012) Volatility dynamics for the S&P 500: further evidence from non-affine, multi-factor jump diffusions. Journal of Banking & Finance, 36 (11). pp. 3110-3121. ISSN 0378-4266

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Abstract

We apply Markov chain Monte Carlo methods to time series data on S&P 500 index returns, and to its option prices via a term structure of VIX indices, to estimate 18 different affine and non-affine stochastic volatility models with one or two variance factors, and where jumps are allowed in both the price and the instantaneous volatility. The in-sample fit to the VIX term structure shows that the second (stochastic long-term volatility) factor is required to fit the VIX term structure. Out-of-sample tests on the fit to individual option prices, as well as in-sample tests, show that the inclusion of jumps is less important than allowing for non-affine dynamics. The estimation and testing periods together cover more than 21 years of daily data.

Item Type: Article
Keywords: Gibbs sampler; Instantaneous volatility dynamics; MCMC; Particle filter; S&P 500 options; VIX
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
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Depositing User: Carol Alexander
Date Deposited: 11 Sep 2012 08:52
Last Modified: 09 Sep 2013 15:57
URI: http://sro.sussex.ac.uk/id/eprint/40638
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