Publication Type

Journal Article

Publication Date

2005

Abstract

This paper is concerned with the specification for modelling financial leverage effect in the context of stochastic volatility (SV) models. Two alternative specifications co-exist in the literature. One is the Euler approximation to the well-known continuous time SV model with leverage effect and the other is the discrete time SV model of Jacquier et al. (J. Econometrics 122 (2004) 185). Using a Gaussian nonlinear state space form with uncorrelated measurement and transition errors, I show that it is easy to interpret the leverage effect in the conventional model whereas it is not clear how to obtain and interpret the leverage effect in the model of Jacquier et al. Empirical comparisons of these two models via Bayesian Markov chain Monte Carlo (MCMC) methods further reveal that the specification of Jacquier et al. is inferior. Simulation experiments are conducted to study the sampling properties of Bayes MCMC for the conventional model.

Keywords

Bayes factors; Leverage effect; Markov chain Monte Carlo; Nonlinear state space models; Quasi maximum likelihood; Particle filter

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

127

Issue

2

First Page

165

Last Page

178

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2004.08.002

Publisher

Elsevier

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://dx.doi.org/10.1016/j.jeconom.2004.08.002

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Econometrics Commons

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