Integrated Ou Processes
Nuffield College, Oxford, Economics WP No 2001-W1
Posted: 17 Jan 2001
Date Written: January 7, 2001
In this paper we study the detailed distributional properties of integrated non-Gaussian OU (intOU) processes. Both exact and approximate results are given. We emphasise the study of the tail behaviour of the intOU process. Our results have many potential applications in financial economics, for OU processes are used as models of instantaneous volatility in stochastic volatility (SV) option pricing models. In this case an intOU process can be regarded as a model of integrated volatility. Hence the tail behaviour of the intOU process will determine the tail behaviour of returns generated by SV models.
Keywords: Background driving Levy process; Chronometer; Co-break; Econometrics; Integrated volatility; Kumulant function; Levy density; Levy process; Option pricing; OU processes; Stochastic volatility.
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