Common Underlying Dynamics in an Emerging Market: From Minutes to Months

TL;DR

This paper demonstrates that a single stochastic volatility model can explain stock price fluctuations across a wide range of time scales in an emerging market, highlighting a common underlying market dynamic.

Contribution

It introduces a modified Heston model with a slow time scale to better fit volatility autocorrelation, unifying market behavior over 35 years.

Findings

Heston model explains fluctuations from 5 minutes to 100 days

Inclusion of slow time scale improves volatility autocorrelation fit

Market dynamics are consistent over 35 years despite macroeconomic unrest

Abstract

We analyse a period spanning 35 years of activity in the Sao Paulo Stock Exchange Index (IBOVESPA) and show that the Heston model with stochastic volatility is capable of explaining price fluctuations for time scales ranging from 5 minutes to 100 days with a single set of parameters. We also show that the Heston model is inconsistent with the observed behavior of the volatility autocorrelation function. We deal with the latter inconsistency by introducing a slow time scale to the model. The fact that the price dynamics in a period of 35 years of macroeconomical unrest may be modeled by the same stochastic process is evidence for a general underlying microscopic market dynamics.