Department of Economics and Business Economics

Leopoldo Catania

A Stochastic Volatility Model with a General Leverage Specification

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We introduce a new stochastic volatility model that postulates a general correlation structure between the shocks of the measurement and log volatility equations at different temporal lags. The resulting specification is able to better characterize the leverage effect and propagation in financial time series. Furthermore, it nests other asymmetric volatility models and can be used for testing and diagnostics. We derive the simulated maximum likelihood and quasi maximum likelihood estimators and investigate their finite sample performance in a simulation study. An empirical illustration shows that the postulated correlation structure improves the fit of the leverage propagation and leads to more precise volatility predictions.

Original languageEnglish
JournalJournal of Business and Economic Statistics
Pages (from-to)678-689
Number of pages12
Publication statusPublished - 2022

    Research areas

  • Asymmetric stochastic volatility, Leverage effect, Volatility prediction

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