Nonparametric Stochastic Volatility
43 Pages Posted: 12 Jul 2008 Last revised: 19 Jul 2018
Date Written: May 30, 2018
We provide nonparametric methods for stochastic volatility modeling. 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, among other features. 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. For these infinitesimal moment estimates, we report an asymptotic theory relying on joint in-fill and long-span arguments which yields consistency and weak convergence under mild assumptions.
Keywords: Spot variance, stochastic volatility, jump, microstructure
JEL Classification: C13, C14, C51, G1
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