Stochastic Volatility of Volatility in Continuous Time
Year: 2009
Type: preprint
Abstract: This paper introduces the concept of stochastic volatility of volatility in continuous time and, hence, extends standard stochastic volatility (SV) models to allow for an additional source of randomness associated with greater variability in the data. We discuss how stochastic volatility of volatility can be defined both non–parametrically, where we link it to the quadratic variation of the stochastic variance process, and parametrically, where we propose two new SV models which allow for stochastic volatility of volatility. In addition, we show that volatility of volatility can be estimated by a novel estimator called pre–estimated spot variance based realised variance.
Source: SSRN Electronic Journal
DOI: 10.2139/ssrn.1415977
Authors: Ole E. Barndorff-Nielsen, Almut Veraart
Institutions: Aarhus University, Imperial College London
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1528531696