Publication Type

Journal Article

Version

acceptedVersion

Publication Date

4-2012

Abstract

In this paper the correlation structure in the classical leverage stochastic volatility (SV) model is generalized based on a linear spline. In the new model the correlation between the return and volatility innovations is time varying and depends nonparametrically on the type of news arrived to the market. Theoretical properties of the proposed model are examined. The model estimation and comparison are conducted by Bayesian methods. The performance of the estimates are examined in simulations. The new model is fitted to daily and weekly US data and compared with the classical SV and GARCH models in terms of their in-sample and out-of-sample performances. Empirical results suggest evidence in favor of the proposed model. In particular, the new model finds strong evidence of time varying leverage effect in individual stocks when the classical model fails to identify the leverage effect.

Keywords

Leverage effect, Simulated maximum likelihood, Laplace approximation, Spline

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

167

Issue

2

First Page

473

Last Page

482

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2011.09.029

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jeconom.2011.09.029

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