Veraart, Almut E. D. and Veraart, Luitgard A. M. 
ORCID: 0000-0003-1183-2227
(2012)
Stochastic volatility and stochastic leverage.
Annals of Finance, 8 (2-3).
pp. 205-233.
ISSN 1614-2446
Abstract
This paper proposes the new concept of stochastic leverage in stochastic volatility models. Stochastic leverage refers to a stochastic process which replaces the classical constant correlation parameter between the asset return and the stochastic volatility process. We provide a systematic treatment of stochastic leverage and propose to model the stochastic leverage effect explicitly, e.g. by means of a linear transformation of a Jacobi process. Such models are both analytically tractable and allow for a direct economic interpretation. In particular, we propose two new stochastic volatility models which allow for a stochastic leverage effect: the generalised Heston model and the generalised Barndorff-Nielsen & Shephard model. We investigate the impact of a stochastic leverage effect in the risk neutral world by focusing on implied volatilities generated by option prices derived from our new models. Furthermore, we give a detailed account on statistical properties of the new mode
| Item Type: | Article |
|---|---|
| Official URL: | http://www.springerlink.com/content/1614-2446/ |
| Additional Information: | © 2012 Springer-Verlag |
| Divisions: | Mathematics |
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
| JEL classification: | C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General C - Mathematical and Quantitative Methods > C5 - Econometric Modeling |
| Date Deposited: | 11 May 2011 15:01 |
| Last Modified: | 13 Sep 2024 23:16 |
| URI: | http://eprints.lse.ac.uk/id/eprint/36108 |
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