Faculty Advisor or Committee Member
Balgobin Nandram, Advisor
This paper explores the fit of a stochastic volatility model, in which the Box-Cox transformation of the squared volatility follows an autoregressive Gaussian distribution, to the continuously compounded daily returns of the Australian stock index. Estimation was difficult, and over-fitting likely, because more variables are present than data. We developed a revised model that held a couple of these variables fixed and then, further, a model which reduced the number of variables significantly by grouping trading days. A Metropolis-Hastings algorithm was used to simulate the joint density and derive estimated volatilities. Though autocorrelations were higher with a smaller Box-Cox transformation parameter, the fit of the distribution was much better.
Worcester Polytechnic Institute
All authors have granted to WPI a nonexclusive royalty-free license to distribute copies of the work. Copyright is held by the author or authors, with all rights reserved, unless otherwise noted. If you have any questions, please contact firstname.lastname@example.org.
Volfson, Alexander, "Exploring the optimal Transformation for Volatility" (2010). Masters Theses (All Theses, All Years). 472.
Metropolis-Hastings algorithm, Bayes, Empirical Bayes, stochastic volatility, Box-Cox transformation