Integrated OU Processes and Non-Gaussian OU-based Stochastic Volatility Models |
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Authors: | Ole E Barndorff-Nielsen Neil Shephard |
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Institution: | Centre for Mathematical Physics and Stochastics (MaPhySto), University of Aarhus ;Nuffield College, Oxford |
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Abstract: | Abstract. In this paper, we study the detailed distributional properties of integrated non-Gaussian Ornstein–Uhlenbeck (intOU) processes. Both exact and approximate results are given. We emphasize the study of the tail behaviour of the intOU process. Our results have many potential applications in financial economics, as OU processes are used as models of instantaneous variance in stochastic volatility (SV) models. In this case, an intOU process can be regarded as a model of integrated variance. Hence, the tail behaviour of the intOU process will determine the tail behaviour of returns generated by SV models. |
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Keywords: | background driving Lévy process chronometer co-break econometrics integrated variance Kumulant function Lévy density Lévy process option pricing OU processes stochastic volatility |
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