Semiparametric stochastic volatility modelling using penalized splines
AbstractStochastic volatility (SV) models mimic many of the stylized facts attributed to time series of asset returns, while maintaining conceptual simplicity. The commonly made assumption of conditionally normally distributed or Student-t-distributed returns, given the volatility, has however been questioned. In this manuscript, we introduce a novel maximum penalized likelihood approach for estimating the conditional distribution in an SV model in a nonparametric way, thus avoiding any potentially critical assumptions on the shape. The considered framework exploits the strengths both of the powerful hidden Markov model machinery and of penalized B-splines, and constitutes a powerful and flexible alternative to recently developed Bayesian approaches to semiparametric SV modelling. We demonstrate the feasibility of the approach in a simulation study before outlining its potential in applications to three series of returns on stocks and one series of stock index returns.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1308.5836.
Date of creation: Aug 2013
Date of revision: Jun 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-31 (All new papers)
- NEP-ECM-2013-08-31 (Econometrics)
- NEP-ETS-2013-08-31 (Econometric Time Series)
- NEP-FOR-2013-08-31 (Forecasting)
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