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A test for a parametric form of the volatility in second-order diffusion models

Author

Listed:
  • Tianshun Yan

    (Xi’an Jiaotong University)

  • Changlin Mei

    (Xi’an Jiaotong University)

Abstract

Second-order diffusion models have been found to be promising in analyzing financial market data. Based on nonparametric fitting, Nicolau (Stat Probabil Lett 78(16):2700–2704, 2008) suggested that the quadratic function may be an appropriate specification of the volatility when a second-order diffusion model is used to analyze some European and American financial market data sets, which motivates us to develop a formal statistical test for this finding. To achieve the task, a generalized likelihood ratio test is proposed in this paper and a residual-based bootstrap is suggested to compute the p value of the test. The analysis of many real-world financial market data sets demonstrates that the quadratic specification of the volatility function is in general reasonable.

Suggested Citation

  • Tianshun Yan & Changlin Mei, 2017. "A test for a parametric form of the volatility in second-order diffusion models," Computational Statistics, Springer, vol. 32(4), pages 1583-1596, December.
  • Handle: RePEc:spr:compst:v:32:y:2017:i:4:d:10.1007_s00180-016-0685-z
    DOI: 10.1007/s00180-016-0685-z
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