Stochastic Elasticity of Volatility Model
نویسنده
چکیده
We model elasticity of volatility as a stochastic process with an eye to merge popular constant elasticity of variance (CEV) and stochastic volatility (SV) models in order to understand when it is appropriate to use absolute or relative changes or some intermediate transformation as well as to compare with more traditional autoregressive exponential stochastic volatility formulations. We describe Markov chain Monte Carlo algorithm to efficiently sample from posterior distribution as well as associated particle filter for likelihood analysis and model comparison. Application to short term interest rate data over 2006-2009 period indicate large swings in the elasticity of volatility with tight posterior confidence. JEL classification: C11, C15, C22, G12
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