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Estimation of Stochastic Volatility Models by Nonparametric Filtering

Kanaya, S; Kristensen, D; (2016) Estimation of Stochastic Volatility Models by Nonparametric Filtering. Econometric Theory , 32 (4) pp. 861-916. 10.1017/S0266466615000079. Green open access

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Abstract

A two-step estimation method of stochastic volatility models is proposed: In the first step, we nonparametrically estimate the (unobserved) instantaneous volatility process. In the second step, standard estimation methods for fully observed diffusion processes are employed, but with the filtered/estimated volatility process replacing the latent process. Our estimation strategy is applicable to both parametric and nonparametric stochastic volatility models, and can handle both jumps and market microstructure noise. The resulting estimators of the stochastic volatility model will carry additional biases and variances due to the first-step estimation, but under regularity conditions we show that these vanish asymptotically and our estimators inherit the asymptotic properties of the infeasible estimators based on observations of the volatility process. A simulation study examines the finite-sample properties of the proposed estimators.

Type: Article
Title: Estimation of Stochastic Volatility Models by Nonparametric Filtering
Open access status: An open access version is available from UCL Discovery
DOI: 10.1017/S0266466615000079
Publisher version: http://dx.doi.org/10.1017/S0266466615000079
Language: English
Additional information: This article has been published in a revised form in Econometric Theory at http://dx.doi.org/10.1017/S0266466615000079. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. Copyright © Cambridge University Press 2015.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1471054
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