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Markov processes and the distribution of volatility:a comparison of discrete and continuous specifications

Taylor, S J (1999) Markov processes and the distribution of volatility:a comparison of discrete and continuous specifications. Philosophical Transactions A: Mathematical, Physical and Engineering Sciences, 357 (1758). pp. 2059-2070. ISSN 1364-503X

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Abstract

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.

Item Type: Article
Journal or Publication Title: Philosophical Transactions A: Mathematical, Physical and Engineering Sciences
Uncontrolled Keywords: conditional state probabilities ; foreign exchange volatility distributions stochastic volatility ; Leptokurtic return distributions ; Markov chain ; mixture distributions ; stochastic volatility
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 43426
Deposited By: ep_importer_pure
Deposited On: 11 Jul 2011 18:59
Refereed?: Yes
Published?: Published
Last Modified: 17 Sep 2013 08:25
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/43426

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