A Bayesian Analysis of Return Dynamics with Lévy Jumps

Download or read book A Bayesian Analysis of Return Dynamics with Lévy Jumps written by Haitao Li and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We have developed Bayesian Markov chain Monte Carlo (MCMC) methods for inferences of continuous-time models with stochastic volatility and infinite-activity Leacute;vy jumps using discretely sampled data. Simulation studies show that (i) our methods provide accurate joint identification of diffusion, stochastic volatility, and Leacute;vy jumps, and (ii) the affine jump-diffusion (AJD) models fail to adequately approximate the behavior of infinite-activity jumps. In particular, the AJD models fail to capture the ldquo;infinitely manyrdquo; small Leacute;vy jumps, which are too big for Brownian motion to model and too small for compound Poisson process to capture. Empirical studies show that infinite-activity Leacute;vy jumps are essential for modeling the Samp;P 500 index returns.