## Modeling Stochastic Volatility with Application to Stock Returns

_IMF Working Papers, June 1, 2003_

## Source details

**Canonical URL:** [Modeling Stochastic Volatility with Application to Stock Returns](https://www.imf.org/en/publications/wp/issues/2016/12/30/modeling-stochastic-volatility-with-application-to-stock-returns-16599)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/30/modeling-stochastic-volatility-with-application-to-stock-returns-16599/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/30/modeling-stochastic-volatility-with-application-to-stock-returns-16599/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/30/modeling-stochastic-volatility-with-application-to-stock-returns-16599/bundle-manifest.json)

## Bibliographic details
- Authors: Noureddine Krichene
- Published: June 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451854848.001

---

### Model and Estimation
- A stochastic volatility model was specified where volatility was driven solely by a latent variable called "news".
- The model was estimated for three stock indices.
- A Markov chain Monte Carlo algorithm was used for:
  - Estimating Bayesian parameters.
  - Filtering volatilities.

### Key Findings
- Volatility persistence being close to one was consistent with both volatility clustering and mean reversion.
- Filtering results indicated highly volatile markets, reflecting frequent pertinent news.
- Diagnostics showed no model failure, although specification improvements were always possible.
- The model corroborated stylized findings in volatility modeling.

### Policy and Market Implications
- Potential value for market participants in asset pricing and risk management.
- Potential value for policymakers in the design of macroeconomic policies conducive to less volatile financial markets.

---

## Content in this bundle

- **Modeling Stochastic Volatility with Application to Stck Returns - WP/03/125**
  - [Modeling Stochastic Volatility with Application to Stck Returns - WP/03/125 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp03125.pdf.md){rel="alternate" type="text/markdown"}
  - [Modeling Stochastic Volatility with Application to Stck Returns - WP/03/125 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp03125.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/modeling-stochastic-volatility-with-application-to-stock-returns-16599_