Journal Article

Semi-Parametric Comparison of Stochastic Volatility Models using Realized Measures

Valentina Corradi and Walter Distaso

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 3, pages 635-667
Published in print July 2006 | ISSN: 0034-6527
Published online July 2006 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2006.00390.x
Semi-Parametric Comparison of Stochastic Volatility Models using Realized Measures

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This paper proposes a procedure to test for the correct specification of the functional form of the volatility process within the class of eigenfunction stochastic volatility models. The procedure is based on the comparison of the moments of realized volatility measures with the corresponding ones of integrated volatility implied by the model under the null hypothesis.

We first provide primitive conditions on the measurement error associated with the realized measure, which allow to construct asymptotically valid specification tests.

Then we establish regularity conditions under which the considered realized measures, namely, realized volatility, bipower variation, and modified subsampled realized volatility, satisfy the given primitive assumptions.

Finally, we provide an empirical illustration based on three stocks from the Dow Jones Industrial Average.

Keywords: C52; G10

Journal Article.  11906 words.  Illustrated.

Subjects: Economics ; Econometric Modelling

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