A CORRELATED STOCHASTIC VOLATILITY MODEL MEASURING LEVERAGE AND OTHER STYLIZED FACTS

Abstract

We analyze a stochastic volatility market model in which volatility is correlated with return and is represented by an Ornstein-Uhlenbeck process. In the framework of this model we exactly calculate the leverage effect and other stylized facts, such as mean reversion, leptokurtosis and negative skewness. We also obtain a close analytical expression for the characteristic function and study the heavy tails of the probability distribution.