Estimating the parameters of stochastic volatility models using option price data
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Description
This article describes a maximum likelihood method for estimating the parameters of the standard square-root stochastic volatility model and a variant of the model that includes jumps in equity prices. The model is fitted to data on the S&P 500 Index and the prices of vanilla options written on the index, for the period 1990 to 2011. The method is able to estimate both the parameters of the physical measure (associated with the index) and the parameters of the risk-neutral measure (associated with the options), including the volatility and jump risk premia. The estimation is implemented using a particle filter whose efficacy is demonstrated under simulation. The computational load of this estimation method, which previously has been prohibitive, is managed by the effective use of parallel computing using graphics processing units (GPUs). The empirical results indicate that the parameters of the models are reliably estimated and consistent with values reported in previous work. In particular, both the volatility risk premium and the jump risk premium are found to be significant.
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ID Code: | 89591 | ||
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Item Type: | Contribution to Journal (Journal Article) | ||
Refereed: | Yes | ||
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Measurements or Duration: | 16 pages | ||
Keywords: | jumps, maximum likelihood, particle filter, risk premia, stochastic volatility | ||
DOI: | 10.1080/07350015.2014.981634 | ||
ISSN: | 0735-0015 | ||
Pure ID: | 32916547 | ||
Divisions: | Past > QUT Faculties & Divisions > QUT Business School Current > Schools > School of Economics & Finance |
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Funding: | |||
Copyright Owner: | Consult author(s) regarding copyright matters | ||
Copyright Statement: | This work is covered by copyright. Unless the document is being made available under a Creative Commons Licence, you must assume that re-use is limited to personal use and that permission from the copyright owner must be obtained for all other uses. If the document is available under a Creative Commons License (or other specified license) then refer to the Licence for details of permitted re-use. It is a condition of access that users recognise and abide by the legal requirements associated with these rights. If you believe that this work infringes copyright please provide details by email to qut.copyright@qut.edu.au | ||
Deposited On: | 28 Oct 2015 02:39 | ||
Last Modified: | 12 Jun 2024 16:26 |
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