Testing the parametric form of the volatility in continuous time diffusion models—a stochastic process approach.
We present new tests for the form of the volatility function which are based on stochastic processes of the integrated volatility. We prove weak convergence of these processes to centered processes whose conditional distributions are Gaussian. In the case of testing for a constant volatility the lim...
| Published in: | Journal of Econometrics Vol. 143; no. 1; pp. 56 - 74 |
|---|---|
| Main Authors: | , |
| Format: | Article |
| Published: |
Elsevier Science
March 2008
|
| Subjects: | |
| Online Access: | View this record in EBSCOhost |
| Summary: | We present new tests for the form of the volatility function which are based on stochastic processes of the integrated volatility. We prove weak convergence of these processes to centered processes whose conditional distributions are Gaussian. In the case of testing for a constant volatility the limiting process are standard Brownian bridges. As a consequence an asymptotic distribution free test and bootstrap tests (for testing of a general parametric form) can easily be implemented. It is demonstrated that the new tests are more than the currently available procedures. The new approach is also demonstrated by means of a simulation study. Copyright (c) 2008 Elsevier B.V. |
|---|