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A Fractionally Integrated Wishart Stochastic Volatility Model

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  • Manabu Asai

    (Soka University, Japan, and University of Pennsylvania)

  • Michael McAleer

    (Erasmus School of Economics, Kyoto University, Japan, and Complutense University of Madrid, Spain)

Abstract

There has recently been growing interest in modeling and estimating alternative continuous time multivariate stochastic volatility models. We propose a continuous timefractionally integrated Wishart stochastic volatility (FIWSV) process. We derive the conditional Laplace transform of the FIWSV model in order to obtain a closed form expression of moments. We conduct a two-step procedure, namely estimating the parameter of fractional integration via log-periodgram regression in the first step, and estimating the remaining parameters via the generalized method of moments in the second step. Monte Carlo results for the procedure shows reasonable performances in finite samples. The empirical results for the bivariate data of the S&P 500 and FTSE100 indexes show that the data favor the new FIWSV processes rather than one-factor and two-factor models of Wishart autoregressive processes for the covariance structure.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-025/III.

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Date of creation: 31 Jan 2013
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Handle: RePEc:dgr:uvatin:20130025

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Keywords: Diffusion process; Multivariate stochastic volatility; Long memory; Fractional Brownian motion; Generalized method of moments;

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  2. Tim Bollerslev & Hao Zhou, 2001. "Estimating stochastic volatility diffusion using conditional moments of integrated volatility," Finance and Economics Discussion Series 2001-49, Board of Governors of the Federal Reserve System (U.S.).
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