Nonparametric Stochastic Volatility
Federico M. Bandi
University of Chicago - Booth School of Business
University of Siena - Department of Economics
May 28, 2010
We provide nonparametric methods for stochastic volatility modelling. Our methods allow for the joint evaluation of return and volatility dynamics with nonlinear drift and diffusion functions, nonlinear leverage effects, and jumps in returns and volatility with possibly state-dependent jump intensities. In the first stage, we identify spot volatility by virtue of jump-robust nonparametric estimates. Using observed prices and estimated spot volatilities, the second stage extracts the functions and parameters driving price and volatility dynamics from nonparametric estimates of the bivariate process' infinitesimal moments. We present a complete asymptotic theory under recurrence, thereby accommodating the persistence properties of volatility in finite samples.
Number of Pages in PDF File: 44
Keywords: Spot variance, stochastic volatility, jump, microstructure
JEL Classification: C13, C14, C51, G1working papers series
Date posted: July 12, 2008 ; Last revised: June 14, 2010
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