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Centre for Mathematical Physics and Stochastics
Department of Mathematical Sciences, University of Aarhus

Funded by The Danish National Research Foundation

MPS-RR 2001-14
June 2001

Integrated OU processes and non-Gaussian OU-based stochastic volatility models


Ole E. Barndorff-Nielsen

Neil Shephard


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) 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.

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This paper has now been published in Scand. J. Statist. 30 (2003), 277-295