Stochastic Volatility model

In [1]:
%matplotlib inline

import numpy as np
import matplotlib.pyplot as plt
import seaborn as sns
import pymc3 as pm
from pymc3.distributions.timeseries import GaussianRandomWalk

from scipy import optimize

Asset prices have time-varying volatility (variance of day over day returns). In some periods, returns are highly variable, while in others very stable. Stochastic volatility models model this with a latent volatility variable, modeled as a stochastic process. The following model is similar to the one described in the No-U-Turn Sampler paper, Hoffman (2011) p21.

\[\sigma \sim Exponential(50)\]
\[\nu \sim Exponential(.1)\]
\[s_i \sim Normal(s_{i-1}, \sigma^{-2})\]
\[log(r_i) \sim t(\nu, 0, exp(-2 s_i))\]

Here, \(r\) is the daily return series and \(s\) is the latent log volatility process.

Build Model

First we load some daily returns of the S&P 500.

In [2]:
n = 400
returns = np.genfromtxt(pm.get_data("SP500.csv"))
array([ 0.002081, -0.010736, -0.002669, -0.008246, -0.029663])

As you can see, the volatility seems to change over time quite a bit but cluster around certain time-periods. Around time-points 2500-3000 you can see the 2009 financial crash.

In [3]:
fig, ax = plt.subplots(figsize=(14, 8))
ax.plot(returns, label='S&P500')
ax.set(xlabel='time', ylabel='returns')

Specifying the model in PyMC3 mirrors its statistical specification.

In [ ]:
with pm.Model() as model:
    step_size = pm.Exponential('sigma', 50.)
    s = GaussianRandomWalk('s', sd=step_size,

    nu = pm.Exponential('nu', .1)

    r = pm.StudentT('r', nu=nu,

Fit Model

For this model, the full maximum a posteriori (MAP) point is degenerate and has infinite density. NUTS, however, gives the correct posterior.

In [5]:
with model:
    trace = pm.sample(tune=2000, nuts_kwargs=dict(target_accept=.9))
Auto-assigning NUTS sampler...
Initializing NUTS using jitter+adapt_diag...
100%|██████████| 2500/2500 [54:36<00:00,  4.20it/s]
In [10]:
pm.traceplot(trace, varnames=['sigma', 'nu']);
In [7]:
fig, ax = plt.subplots()

plt.plot(trace['s'].T, 'b', alpha=.03);
ax.set(title=str(s), xlabel='time', ylabel='log volatility');

Looking at the returns over time and overlaying the estimated standard deviation we can see how the model tracks the volatility over time.

In [11]:
fig, ax = plt.subplots(figsize=(14, 8))
ax.plot(np.exp(trace[s].T), 'r', alpha=.03);
ax.set(xlabel='time', ylabel='returns')
ax.legend(['S&P500', 'stoch vol']);