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Volatility dynamics for the S&P 500: further evidence from non-affine, multi-factor jump diffusions

journal contribution
posted on 2023-06-08, 12:23 authored by Andreas KaeckAndreas Kaeck, Carol AlexanderCarol Alexander
We apply Markov chain Monte Carlo methods to time series data on S&P 500 index returns, and to its option prices via a term structure of VIX indices, to estimate 18 different affine and non-affine stochastic volatility models with one or two variance factors, and where jumps are allowed in both the price and the instantaneous volatility. The in-sample fit to the VIX term structure shows that the second (stochastic long-term volatility) factor is required to fit the VIX term structure. Out-of-sample tests on the fit to individual option prices, as well as in-sample tests, show that the inclusion of jumps is less important than allowing for non-affine dynamics. The estimation and testing periods together cover more than 21 years of daily data.

History

Publication status

  • Published

Journal

Journal of Banking and Finance

ISSN

0378-4266

Publisher

Elsevier

Issue

11

Volume

36

Page range

3110-3121

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2012-09-11

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