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Box-cox Stochastic Volatility Models With Heavy-tails and Correlated Errors

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posted on 05.06.2017, 03:20 authored by Zhang, Xibin, King, Maxwell L.
Paper not available. Full text of working paper suppressed by author. This paper presents a Markov chain Monte Carlo (MCMC) algorithm to estimate parameters and latent stochastic processes in the asymmetric stochastic volatility (SV) model, in which the Box-Cox transformation of the squared volatility follows an autoregressive Gaussian distribution and the marginal density of asset returns has heavy-tails. To test for the significance of the Box-Cox transformation parameter, we present the likelihood ratio statistic, in which likelihood functions can be approximated using a particle filter and a Monte Carlo kernel likelihood. When applying the heavy-tailed asymmetric Box-Cox SV model and the proposed sampling algorithm to continuously compounded daily returns of the Australian stock index, we find significant empirical evidence supporting the Box-Cox transformation of the squared volatility against the alternative model involving a logarithmic transformation.

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Year of first publication

2004

Series

Department of Econometrics and Business Statistics

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