Essays on stochastic volatility

Abstract: This dissertation consists of five papers concerned with the estimation and analysis of financial price processes. The first paper develops a stock price model and analyzes the impact of the US and the regional European stock markets on the local European countries’ stock markets. Among several things, we find that the dependencies among the stock markets do not increase during periods of distress. The second paper investigates the spillover from the US and Japanese stock markets to the local stock markets in the Pacific Basin region and China using the model in the first paper. We find that identification of jumps can be important for portfolio reallocation. Further, on most occasions the spillovers from jumps are not higher than spillover from normal returns. The third paper analyzes the volatility risk premium using data from the EUROSTOXX 50 stock index and its associated volatility index. The estimated volatility risk premium is analyzed from a portfolio viewpoint and the result is that the volatility risk premium seems to be too negative. The fourth paper tests the expectation hypothesis on the VIX futures market and shows that neglecting the volatility risk premium the expectation hypothesis is rejected. However, when we assume that a volatility risk premium exists and we subtract that risk premium from the VIX futures prices we can not any longer reject the expectation hypothesis. The fifth paper develops and estimates a model for power prices which is able to capture the extreme prices characterizing power prices. Therefore, the model is attractive for risk management and derivative pricing.