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Stochastic Volatility: Likelihood Inference And Comparison With Arch Models

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  • Sangjoon Kim

    (Salomon Brothers Asia Limited, Tokyo, Japan)

  • Neil Shephard

    (Nuffield College, Oxford University, Oxford)

  • Siddhartha Chib

    (Washington University, St. Louis)

Abstract

In this paper, Markov chain Monte Carlo sampling methods are exploited to provide a unified, practical likelihood-based framework for the analysis of stochastic volatility models. A highly effective method is developed that samples all the unobserved volatilities at once using an approximating offset mixture model, followed by an importance reweighting procedure. This approach is compared with several alternative methods using real data. The paper also develops simulation- based methods for filtering, likelihood evaluation and model failure diagnostics. The issue of model choice using non-nested likelihood ratios and Bayes factors is also investigated. These methods are used to compare the fit of stochastic volatility and GARCH models. All the procedures are illustrated in detail.

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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 9610002.

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Date of creation: 07 Oct 1996
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Handle: RePEc:wpa:wuwpem:9610002

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Web page: http://128.118.178.162

Related research

Keywords: Bayes estimation; Bayes factors; GARCH; Gibbs sampler; Heteroscedasticity; Maximum~likelihood; Likelihood ratio; Markov chain Monte Carlo; Quasi-maximum likelihood; Simulation; Stochastic EM algorithm; Stochastic volatility; Stock returns.;

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  1. GHYSELS, Eric & HARVEY, Andrew & RENAULT, Eric, 1995. "Stochastic Volatility," CORE Discussion Papers 1995069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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