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Estimating Latent Variables and Jump Diffusion Models Using High-Frequency Data

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  • George J. Jiang
  • Roel C. A. Oomen

Abstract

This article proposes a new approach to exploit the information in high-frequency data for the statistical inference of continuous-time affine jump diffusion (AJD) models with latent variables. For this purpose, we construct unbiased estimators of the latent variables and their power functions on the basis of the observed state variables over extended horizons. With the estimates of the latent variables, we propose a generalized method of moments (GMM) procedure for the estimation of AJD models with the distinguishing feature that moments of both observed and latent state variables can be used without resorting to path simulation or discretization of the continuous-time process. Using high frequency return observations of the S&P 500 index, we implement our estimation approach to various continuous-time asset return models with stochastic volatility and random jumps. Copyright 2007, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbl007
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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 5 (2007)
Issue (Month): 1 ()
Pages: 1-30

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Handle: RePEc:oup:jfinec:v:5:y:2007:i:1:p:1-30

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Cited by:
  1. Stanislav Khrapov, 2011. "Pricing Central Tendency in Volatility," Working Papers w0168, Center for Economic and Financial Research (CEFIR).
  2. Carl Chiarella & Thuy-Duong To, 2005. "The Volatility Structure of the Fixed Income Market under the HJM Framework: A Nonlinear Filtering Approach," Research Paper Series 150, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Fleming, Jeff & Paye, Bradley S., 2011. "High-frequency returns, jumps and the mixture of normals hypothesis," Journal of Econometrics, Elsevier, vol. 160(1), pages 119-128, January.
  4. Jan Hanousek & Evzen Kocenda & Jan Novotny, 2011. "The Identification of Price Jumps," CERGE-EI Working Papers wp434, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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