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Beyond Stochastic Volatility And Jumps In Returns And Volatility, Garland Durham, Yang-Ho Park
Beyond Stochastic Volatility And Jumps In Returns And Volatility, Garland Durham, Yang-Ho Park
Finance
While a great deal of attention has been focused on stochastic volatility in stock returns, there is strong evidence suggesting that return distributions have time-varying skewness and kurtosis as well. Under the risk-neutral measure, for example, this can be seen from variation across time in the shape of Black-Scholes implied volatility smiles. This paper investigates model characteristics that are consistent with variation in the shape of return distributions using a stochastic volatility model with a regime-switching feature to allow for random changes in the parameters governing volatility of volatility, leverage effect and jump intensity. The analysis consists of two steps. …