Nonparametric model validations for hidden Markov models with applications in financial econometrics
AbstractWe address the nonparametric model validation problem for hidden Markov models with partially observable variables and hidden states. We achieve this goal by constructing a nonparametric simultaneous confidence envelope for transition density function of the observable variables and checking whether the parametric density estimate is contained within such an envelope. Our specification test procedure is motivated by a functional connection between the transition density of the observable variables and the Markov transition kernel of the hidden states. Our approach is applicable for continuous-time diffusion models, stochastic volatility models, nonlinear time series models, and models with market microstructure noise.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Econometrics.
Volume (Year): 162 (2011)
Issue (Month): 2 (June)
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Web page: http://www.elsevier.com/locate/jeconom
Confidence envelope Diffusion model Hidden Markov model Market microstructure noise Model validation Nonlinear time series Transition density Stochastic volatility;
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