Comparison of the Korean and US Stock Markets Using Continuous-time Stochastic Volatility Models

Artikel

We estimate three continuous-time stochastic volatility models following the approach by Aït-Sahalia and Kimmel (2007) to compare the Korean and US stock markets. To do this, the Heston, GARCH, and CEV models are applied to the KOSPI 200 and S&P 500 Index. For the latent volatility variable, we generate and use the integrated volatility proxy using the implied volatility of short-dated at-the-money option prices. We conduct MLE in order to estimate the parameters of the stochastic volatility models. To do this we need the transition probability density function (TPDF), but the true TPDF is not available for any of the models in this paper. Therefore, the TPDFs are approximated using the irreducible method introduced in Aït-Sahalia (2008). Among three stochastic volatility models, the Heston model and the CEV model are found to be best for the Korean and US stock markets, respectively. There exist relatively strong leverage effects in both countries. Despite the fact that the long-run mean level of the integrated volatility proxy (IV) was not statistically significant in either market, the speeds of the mean reversion parameters are statistically significant and meaningful in both markets. The IV is found to return to its long-run mean value more rapidly in Korea than in the US. All parameters related to the volatility function of the IV are statistically significant. Although the volatility of the IV is more elastic in the US stock market, the volatility itself is greater in Korea than in the US over the range of the observed IV.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: KDI Journal of Economic Policy ; ISSN: 2586-4130 ; Volume: 40 ; Year: 2018 ; Issue: 4 ; Pages: 1-22 ; Sejong: Korea Development Institute (KDI)

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Model Construction and Estimation ; Financial Econometrics
• Subject: Continuous-time Stochastic Volatility Model ; Integrated Volatility Proxy ; Maximum Likelihood Estimation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Choi, Seungmoon
• Event: Veröffentlichung
• (who): Korea Development Institute (KDI)
• (where): Sejong
• (when): 2018

Further information

• DOI: doi:10.23895/kdijep.2018.40.4.1
• Handle: http://hdl.handle.net/10419/200829
• Last update: 10.03.2025, 11:42 AM CET