The microstructure of stochastic volatility models with self-exciting jump dynamics

DOI10.1214/22-AAP1796zbMATH Open1504.60054arXiv1911.12969MaRDI QIDQ2108901FDOQ2108901

Ulrich Horst, Wei Xu

Publication date: 20 December 2022

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We provide a general probabilistic framework within which we establish scaling limits for a class of continuous-time stochastic volatility models with self-exciting jump dynamics. In the scaling limit, the joint dynamics of asset returns and volatility is driven by independent Gaussian white noises and two independent Poisson random measures that capture the arrival of exogenous shocks and the arrival of self-excited shocks, respectively. Various well-studied stochastic volatility models with and without self-exciting price/volatility co-jumps are obtained as special cases under different scaling regimes. We analyze the impact of external shocks on the market dynamics, especially their impact on jump cascades and show in a mathematically rigorous manner that many small external shocks may tigger endogenous jump cascades in asset returns and stock price volatility.

Full work available at URL: https://arxiv.org/abs/1911.12969

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zbMATH Keywords

Hawkes processstochastic volatilitybranching processself-exciting jumpsaffine model

Mathematics Subject Classification ID

Functional limit theorems; invariance principles (60F17) Branching processes (Galton-Watson, birth-and-death, etc.) (60J80) Stable stochastic processes (60G52) White noise theory (60H40) Actuarial science and mathematical finance (91G99)

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• The rough Hawkes Heston stochastic volatility model

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