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A Stochastic Volatility Model With a General Leverage Specification

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  • Leopoldo Catania

Abstract

We introduce a new stochastic volatility model that postulates a general correlation structure between the shocks of the measurement and log volatility equations at different temporal lags. The resulting specification is able to better characterize the leverage effect and propagation in financial time series. Furthermore, it nests other asymmetric volatility models and can be used for testing and diagnostics. We derive the simulated maximum likelihood and quasi maximum likelihood estimators and investigate their finite sample performance in a simulation study. An empirical illustration shows that the postulated correlation structure improves the fit of the leverage propagation and leads to more precise volatility predictions.

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  • Leopoldo Catania, 2022. "A Stochastic Volatility Model With a General Leverage Specification," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(2), pages 678-689, April.
    • Handle: RePEc:taf:jnlbes:v:40:y:2022:i:2:p:678-689
    DOI: 10.1080/07350015.2020.1855187
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    Cited by:

    1. Lange, Rutger-Jan, 2024. "Bellman filtering and smoothing for state–space models," Journal of Econometrics, Elsevier, vol. 238(2).
    2. Amendola, A. & Candila, V. & Cipollini, F. & Gallo, G.M., 2024. "Doubly multiplicative error models with long- and short-run components," Socio-Economic Planning Sciences, Elsevier, vol. 91(C).
    3. repec:cte:wsrepe:36569 is not listed on IDEAS
    4. Romero, Eva, 2024. "A stochastic volatility model for volatility asymmetry and propagation," DES - Working Papers. Statistics and Econometrics. WS 43887, Universidad Carlos III de Madrid. Departamento de Estadística.

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