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A comparison between several correlated stochastic volatility models

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  • Perelló, Josep
  • Masoliver, Jaume
  • Anento, Napoleón

Abstract

We compare the most common stochastic volatility models such as the Ornstein–Uhlenbeck (OU), the Heston and the exponential OU models. We try to decide which is the most appropriate one by studying their volatility autocorrelation and leverage effect, and thus outline the limitations of each model. We add empirical research on market indices confirming the universality of the leverage and volatility correlations.

Suggested Citation

  • Perelló, Josep & Masoliver, Jaume & Anento, Napoleón, 2004. "A comparison between several correlated stochastic volatility models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 134-137.
    • Handle: RePEc:eee:phsmap:v:344:y:2004:i:1:p:134-137
    DOI: 10.1016/j.physa.2004.06.103
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    References listed on IDEAS

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    1. Jean-Pierre Fouque & George Papanicolaou & K. Ronnie Sircar, 2000. "Mean-Reverting Stochastic Volatility," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 101-142.
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    Cited by:

    1. Jaume Masoliver & Josep Perello, 2006. "Multiple time scales and the exponential Ornstein-Uhlenbeck stochastic volatility model," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 423-433.
    2. Eisler, Z. & Kertész, J., 2004. "Multifractal model of asset returns with leverage effect," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 343(C), pages 603-622.
    3. Nakamura, Tomomichi & Small, Michael, 2007. "Tests of the random walk hypothesis for financial data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 377(2), pages 599-615.
    4. Wei, Yu, 2012. "Forecasting volatility of fuel oil futures in China: GARCH-type, SV or realized volatility models?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(22), pages 5546-5556.
    5. Zoltan Eisler & Janos Kertesz, 2004. "Multifractal model of asset returns with leverage effect," Papers cond-mat/0403767, arXiv.org, revised May 2004.
    6. Buchbinder, G.L. & Chistilin, K.M., 2007. "Multiple time scales and the empirical models for stochastic volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 168-178.

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