Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Markov processes and the distribution of volatility
T2 - a comparison of discrete and continuous specifications
AU - Taylor, S J
PY - 1999/8/1
Y1 - 1999/8/1
N2 - Two mixtures of normal distributions, created by persistent changes in volatility, are compared as models for asset returns. A Markov chain with two states for volatility is contrasted with an autoregressive Gaussian process for the logarithm of volatility. The conditional variances of asset returns are shown to have a bimodal distribution for the former process when volatility is persistent that contrasts with a unimodal distribution for the latter process. A test procedure based upon this contrast shows that a log–normal distribution for sterling/dollar volatility is far more credible than only two volatility states.
AB - Two mixtures of normal distributions, created by persistent changes in volatility, are compared as models for asset returns. A Markov chain with two states for volatility is contrasted with an autoregressive Gaussian process for the logarithm of volatility. The conditional variances of asset returns are shown to have a bimodal distribution for the former process when volatility is persistent that contrasts with a unimodal distribution for the latter process. A test procedure based upon this contrast shows that a log–normal distribution for sterling/dollar volatility is far more credible than only two volatility states.
KW - conditional state probabilities
KW - foreign exchange volatility distributions stochastic volatility
KW - Leptokurtic return distributions
KW - Markov chain
KW - mixture distributions
KW - stochastic volatility
U2 - 10.1098/rsta.1999.0417
DO - 10.1098/rsta.1999.0417
M3 - Journal article
VL - 357
SP - 2059
EP - 2070
JO - Philosophical Transactions A: Mathematical, Physical and Engineering Sciences
JF - Philosophical Transactions A: Mathematical, Physical and Engineering Sciences
SN - 1364-503X
IS - 1758
ER -