Stochastic volatility jump-diffusions for European equity index dynamics

Kaeck, A. and Alexander, C. (2013) Stochastic volatility jump-diffusions for European equity index dynamics. European Financial Management, 19 (3). pp. 470-496. ISSN 1468-036X doi: 10.1111/j.1468-036X.2010.00613.x

Abstract/Summary

Major research on equity index dynamics has investigated only US indices (usually the S&P 500) and has provided contradictory results. In this paper a clarification and extension of that previous research is given. We find that European equity indices have quite different dynamics from the S&P 500. Each of the European indices considered may be satisfactorily modelled using either an affine model with price and volatility jumps or a GARCH volatility process without jumps. The S&P 500 dynamics are much more difficult to capture in a jump-diffusion framework.