IDEAS home Printed from https://ideas.repec.org/a/kap/revdev/v24y2021i2d10.1007_s11147-020-09173-1.html
   My bibliography  Save this article

Bayesian estimation of the stochastic volatility model with double exponential jumps

Author

Listed:
  • Jinzhi Li

    (Minzu University of China)

Abstract

This paper generalizes the stochastic volatility model to allow for the double exponential jumps. To derive the jumps and time-varying volatility in returns, we implement an efficient Markov chain Monte Carlo approach based on the band and sparse matrix algorithms used in Chan and Hsiao (SSRN Electron J., 2013, https://doi.org/10.2139/ssrn.2359838 ) to estimate this model. We illustrate the the methodology using the daily data for the Shanghai Composite Index, Hangseng Index, Nikkei 225 Index and Kospi Index. We find that the stochastic volatility model with double exponential jumps provide better fitness in sample period.

Suggested Citation

  • Jinzhi Li, 2021. "Bayesian estimation of the stochastic volatility model with double exponential jumps," Review of Derivatives Research, Springer, vol. 24(2), pages 157-172, July.
  • Handle: RePEc:kap:revdev:v:24:y:2021:i:2:d:10.1007_s11147-020-09173-1
    DOI: 10.1007/s11147-020-09173-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11147-020-09173-1
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/s11147-020-09173-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. S. G. Kou, 2002. "A Jump-Diffusion Model for Option Pricing," Management Science, INFORMS, vol. 48(8), pages 1086-1101, August.
    2. Bjørn Eraker & Michael Johannes & Nicholas Polson, 2003. "The Impact of Jumps in Volatility and Returns," Journal of Finance, American Finance Association, vol. 58(3), pages 1269-1300, June.
    3. Fuh, Cheng-Der & Luo, Sheng-Feng & Yen, Ju-Fang, 2013. "Pricing discrete path-dependent options under a double exponential jump–diffusion model," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2702-2713.
    4. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 2002. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 69-87, January.
    5. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models: Comments: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 413-417, October.
    6. Haitao Li & Martin T. Wells & Cindy L. Yu, 2008. "A Bayesian Analysis of Return Dynamics with Lévy Jumps," The Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2345-2378, September.
    7. S. G. Kou & Hui Wang, 2004. "Option Pricing Under a Double Exponential Jump Diffusion Model," Management Science, INFORMS, vol. 50(9), pages 1178-1192, September.
    8. Louis O. Scott, 1997. "Pricing Stock Options in a Jump‐Diffusion Model with Stochastic Volatility and Interest Rates: Applications of Fourier Inversion Methods," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 413-426, October.
    9. Joshua C C Chan & Cody Y L Hsiao, 2013. "Estimation of Stochastic Volatility Models with Heavy Tails and Serial Dependence," CAMA Working Papers 2013-74, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    10. Yu, Jun, 1999. "Forecasting Volatility in the New Zealand Stock Market," Working Papers 175, Department of Economics, The University of Auckland.
    11. Chan, Joshua C.C. & Grant, Angelia L., 2016. "Modeling energy price dynamics: GARCH versus stochastic volatility," Energy Economics, Elsevier, vol. 54(C), pages 182-189.
    12. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
    13. Hossein Asgharian & Christoffer Bengtsson, 2006. "Jump Spillover in International Equity Markets," Journal of Financial Econometrics, Oxford University Press, vol. 4(2), pages 167-203.
    14. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maciej Kostrzewski & Jadwiga Kostrzewska, 2021. "The Impact of Forecasting Jumps on Forecasting Electricity Prices," Energies, MDPI, vol. 14(2), pages 1-17, January.
    2. Chris Brooks & Marcel Prokopczuk, 2013. "The dynamics of commodity prices," Quantitative Finance, Taylor & Francis Journals, vol. 13(4), pages 527-542, March.
    3. Lian, Yu-Min & Chen, Jun-Home, 2022. "Foreign exchange option pricing under regime switching with asymmetrical jumps," Finance Research Letters, Elsevier, vol. 46(PA).
    4. Michael C. Fu & Bingqing Li & Rongwen Wu & Tianqi Zhang, 2020. "Option Pricing Under a Discrete-Time Markov Switching Stochastic Volatility with Co-Jump Model," Papers 2006.15054, arXiv.org.
    5. Pezzo, Rosanna & Uberti, Mariacristina, 2006. "Approaches to forecasting volatility: Models and their performances for emerging equity markets," Chaos, Solitons & Fractals, Elsevier, vol. 29(3), pages 556-565.
    6. Kaeck, Andreas & Rodrigues, Paulo & Seeger, Norman J., 2017. "Equity index variance: Evidence from flexible parametric jump–diffusion models," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 85-103.
    7. Liu, Qingfu & Tu, Anthony H., 2012. "Jump spillovers in energy futures markets: Implications for diversification benefits," Energy Economics, Elsevier, vol. 34(5), pages 1447-1464.
    8. Steven Kou & Cindy Yu & Haowen Zhong, 2017. "Jumps in Equity Index Returns Before and During the Recent Financial Crisis: A Bayesian Analysis," Management Science, INFORMS, vol. 63(4), pages 988-1010, April.
    9. Maciej Kostrzewski, 2016. "Bayesian SVLEDEJ Model for Detecting Jumps in Logarithmic Growth Rates of One Month Forward Gas Contract Prices," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 8(3), pages 161-179, September.
    10. Xiao-Bin Liu & Yong Li, 2013. "Bayesian testing volatility persistence in stochastic volatility models with jumps," Quantitative Finance, Taylor & Francis Journals, vol. 14(8), pages 1415-1426, December.
    11. Andreas Kaeck & Carol Alexander, 2013. "Stochastic Volatility Jump†Diffusions for European Equity Index Dynamics," European Financial Management, European Financial Management Association, vol. 19(3), pages 470-496, June.
    12. Virbickaitė, Audronė & Ausín, M. Concepción & Galeano, Pedro, 2020. "Copula stochastic volatility in oil returns: Approximate Bayesian computation with volatility prediction," Energy Economics, Elsevier, vol. 92(C).
    13. Xiaodong Du & Dermot J. Hayes & Cindy L. Yu, 2010. "Dynamics of Biofuel Stock Prices: A Bayesian Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(2), pages 418-425.
    14. Leopoldo Catania & Nima Nonejad, 2016. "Density Forecasts and the Leverage Effect: Some Evidence from Observation and Parameter-Driven Volatility Models," Papers 1605.00230, arXiv.org, revised Nov 2016.
    15. Frances Shaw & Finbarr Murphy & Fergal G. O’Brien, 2016. "Jumps in Euribor and the effect of ECB monetary policy announcements," Environment Systems and Decisions, Springer, vol. 36(2), pages 142-157, June.
    16. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2005. "Volatility Forecasting," PIER Working Paper Archive 05-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    17. Andreas Kaeck & Carol Alexander, 2010. "Stochastic Volatility Jump-Diffusions for Equity Index Dynamics," ICMA Centre Discussion Papers in Finance icma-dp2010-06, Henley Business School, University of Reading.
    18. Mark Broadie & Jerome B. Detemple, 2004. "ANNIVERSARY ARTICLE: Option Pricing: Valuation Models and Applications," Management Science, INFORMS, vol. 50(9), pages 1145-1177, September.
    19. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2006. "Volatility and Correlation Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 15, pages 777-878, Elsevier.
    20. Gudkov, Nikolay & Ignatieva, Katja, 2021. "Electricity price modelling with stochastic volatility and jumps: An empirical investigation," Energy Economics, Elsevier, vol. 98(C).

    More about this item

    Keywords

    Stochastic volatility; Double exponential jumps; MCMC; Stock indexes;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:revdev:v:24:y:2021:i:2:d:10.1007_s11147-020-09173-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.