Multiple time scales and the exponential Ornstein-Uhlenbeck stochastic volatility model

Details Multiple time scales and the exponential Ornstein-Uhlenbeck stochastic volatility model Multiple time scales and the exponential Ornstein-Uhlenbeck stochastic volatility model

2005-01-26

arxiv.org/abs/cond-mat/0501639v1

Quantitative Finance 6, 423-433 (2006)

Physics

Condensed Matter

Other Condensed Matter

24 pages, 9 colored figures, Workshop Volatility of Financial Markets (Leiden 18-29 October 2004)

Scientific paper

10.1080/14697680600727547

We study the exponential Ornstein-Uhlenbeck stochastic volatility model and observe that the model shows a multiscale behavior in the volatility autocorrelation. It also exhibits a leverage correlation and a probability profile for the stationary volatility which are consistent with market observations. All these features make the model quite appealing since it appears to be more complete than other stochastic volatility models also based on a two-dimensional diffusion. We finally present an approximate solution for the return probability density designed to capture the kurtosis and skewness effects.

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