Cover IMF Working Papers
Modeling Stochastic Volatility with Application to Stock Returns
Author:
Mr. Noureddine Krichene
Search for other papers by Mr. Noureddine Krichene in
Current site
Google Scholar
PubMedClose
Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 125
Language:
English
Publication Date:
01 Jun 2003
DOI:
https://doi.org/10.5089/9781451854848.001
ISBN:
9781451854848
ISSN:
1018-5941
Pages:
27
Keywords:
WP; mean reversion; second moment
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (809.4 KB) Download Epub
A stochastic volatility model where volatility was driven solely by a latent variable called news was estimated for three stock indices. A Markov chain Monte Carlo algorithm was used for estimating Bayesian parameters and filtering volatilities. Volatility persistence being close to one was consistent with both volatility clustering and mean reversion. Filtering showed highly volatile markets, reflecting frequent pertinent news. Diagnostics showed no model failure, although specification improvements were always possible. The model corroborated stylized findings in volatility modeling and has potential value for market participants in asset pricing and risk management, as well as for policymakers in the design of macroeconomic policies conducive to less volatile financial markets.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2003: Issue 125