Part of the Dynamic Modeling and Econometrics in Economics and Finance book series (DMEF, volume 6)
Research into the behaviour of stock markets can be traced back as far as the beginning of the twentieth century when Bachelier (1900) introduced the random walk hypothesis for changes in security prices. Then, in the fifties, Markowitz (1952) developed what has become known as the modern portfolio theory, which basically states that in order to obtain higher expected returns one has to accept a higher level of risk. The importance of the variability of security price changes extends however beyond that of portfolio allocation issues as return volatility also plays a crucial role in a number of other areas such as the pricing of derivatives, hedging decisions and the calculation of Value-at-Risk measures. Perhaps its significance has been most concisely and persuasively summarised by Andersen and Bollerslev (1998) when they simply state
“Volatility permeates finance.”
KeywordsStochastic Volatility Implied Volatility GARCH Model Return Volatility Stochastic Volatility Model
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© Springer Science+Business Media Dordrecht 2003