Stochastic volatility with leverage: fast likelihood inference.
Omori, Yasuhiro and Chib, Siddhartha and Shephard, Neil and Nakajima, Jouchi (2004) Stochastic volatility with leverage: fast likelihood inference. Working Paper. Nuffield College (University of Oxford).
Kim, Shephard and Chib (1998) provided a Bayesian analysis of stochastic volatility models based on a very fast and reliable Markov chain Monte Carlo (MCMC) algorithm. Their method ruled out the leverage effect, which limited its scope for applications. Despite this, their basic method has been extensively used in financial economics literature and more recently in macroeconometrics. In this paper we show how to overcome the limitation of this analysis so that the essence of the Kim, Shephard and Chib (1998) can be used to deal with the leverage effect, greatly extending the applicability of this method. Several illustrative examples are provided.
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