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Stochastic volatility and stochastic leverage

Veraart, Almut E. D. and Veraart, Luitgard A. M. (2012) Stochastic volatility and stochastic leverage. Annals of Finance, 8 (2-3). pp. 205-233. ISSN 1614-2446

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Identification Number: 10.1007/s10436-010-0157-3

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
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
Sets: Departments > Mathematics
Collections > Economists Online
Date Deposited: 11 May 2011 15:01
Last Modified: 30 May 2014 14:02
URI: http://eprints.lse.ac.uk/id/eprint/36108

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