Maximum likelihood estimation of non-affine volatility processes
In this paper we develop a new estimation method for extracting non-affine latent stochastic volatility and risk premia from measures of model-free realized and risk-neutral integrated volatility. We estimate non-affine models with nonlinear drift and constant elasticity of variance and we compare them to the popular square-root stochastic volatility model. Our empirical findings are: (1) the square-root model is misspecified; (2) the inclusion of constant elasticity of variance and nonlinear drift captures stylized facts of volatility dynamics and (3) the square-root stochastic volatility model is explosive under the risk-neutral probability measure.
Year of publication: |
2011
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Authors: | Chourdakis, Kyriakos ; Dotsis, George |
Published in: |
Journal of Empirical Finance. - Elsevier, ISSN 0927-5398. - Vol. 18.2011, 3, p. 533-545
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Publisher: |
Elsevier |
Keywords: | Non-affine volatility Integrated volatility Volatility risk premium Markov chain approximation |
Saved in:
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