A common jump factor stochastic volatility model

- Multivariate stochastic volatility model, with common jumps.
- Compound binomial process with random discontinuous jumps.
- Patterns of sudden changes in volatility of emerging markets.
- Simultaneous modeling of Real and Lira exchange rates.

We introduce a new multivariate stochastic volatility model, based on the presence of a latent common factor with random jumps. The common factor is parameterized as a permanent component using a compound binomial process. This model can capture common jumps in the latent volatilities between markets, with particular relevance in the presence of crises and contagion in emerging markets.