The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Stochastic Volatility Models

  • Neil Shephard
Reference work entry


Stochastic volatility (SV) is the main concept used in the fields of financial economics and mathematical finance to deal with the endemic time-varying volatility and codependence found in financial markets. Here I trace the origins of SV and provide links with the basic models used today in the literature. I briefly discuss some of the innovations in the second generation of SV models and discuss the literature on conducting inference for SV models. I talk about the use of SV to price options, and consider the connection of SV with realized volatility.


Asset pricing Black–Scholes–Merton prices Brownian motion Dambis–Dubins–Schwartz theorem Financial econometrics Generalized method of moments (GMM) estimators Kalman filter Markov chain Monto Carlo (MCMC) methods Markov processes Martingales Multivariate models Option pricing theory Options Probability Quadratic variation (QV) process Realized volatility Stochastic discount factor (SDF) approach Stochastic volatility 

JEL Classification

C22 C51 C53 G12 G13 
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My research is supported by the Economic and Social Science Research Council (UK) through the grantHigh frequency financial econometrics based upon power variation’.


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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Neil Shephard
    • 1
  1. 1.