Preprint2000

Non-Gaussian OU based models and some of their uses in financial economics

Ole Eiler Barndorff-Nielsen · Neil Shephard

112 citations0/0 files storedRePEc: Research Papers in Economics

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Stochastic processes and financial applications Financial Risk and Volatility Modeling Complex Systems and Time Series Analysis

Abstract

Non-Gaussian processes of Ornstein-Uhlenbeck type, or OU processes for short, offer the possibility of capturing important distributional deviations from Gaussianity and for flexible modelling of dependence structures. This paper develops this potential, drawing on and extending powerful results from probability theory for applications in statistical analysis. Their power is illustrated by a sustained application of OU processes within the context of finance and econometrics. We construct continuous time stochastic volatility models for financial assets where the volatility processes are superpositions of positive OU processes, and we study these models in relation to financial data and theory.

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References

1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1993A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options 2012The Econometrics of Financial Markets 2005Stochastic Integration and Differential Equations 1987The Pricing of Options on Assets with Stochastic Volatilities 1998Answering the Skeptics: Yes, Standard Volatility Models do Provide Accurate Forecasts 2000Transform Analysis and Asset Pricing for Affine Jump-diffusions 1973A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices

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