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Estimating a Semiparametric Asymmetric Stochastic Volatility Model with a Dirichlet Process Mixture
Social Science Research Network
This paper extends the stochastic volatility with leverage model, where returns are correlated with volatility, by flexibly modeling the bivariate distribution of the return and volatility innovations nonparametrically. The novelty of the paper is in modeling the unknown distribution with an infinite ordered mixture of bivariate normals with mean zero, but whose mixture probabilities and covariance matrices are unknown and modeled with the Dirichlet Process prior. A Bayesian Markov chain Montedoi:10.2139/ssrn.2060671 fatcat:qw76sjsyyjgehhu7tyzk6wxh34