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Centre for Mathematical Physics and Stochastics
Department of Mathematical Sciences, University of Aarhus

Funded by The Danish National Research Foundation

MPS-RR 1998-18
September 1998

Incorporation of a Leverage Effect in a Stochastic Volatility Model


Ole E. Barndorff-Nielsen

Neil Shephard


In this note we show how the stochastic volatility model of [B-NiSh98a] can be generalised to allow for the leverage effect. That is where a negative return sequence is associated with increases in volatility. This is important in empirical work on stock returns. This form of model allows a great deal of analytic tractability - inheriting from our original model formulation many attractive features.

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This paper has now been published in Indluded in The Journal of the Royal Statistical Society B 63, 167-241 (2001)