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A comparative study of several bootstrap-based tests for the volatility in continuous-time diffusion models

Author

Listed:
  • Tianshun Yan

    (Xi’an Jiaotong University
    Chongqing Technology and Business University)

  • Liping Zhang

    (Chongqing Technology and Business University)

Abstract

This article develops three bootstrap-based tests for a parametric form of volatility function in continuous-time diffusion models. The three tests are the generalized likelihood ratio test by Fan et al. (Ann Stat 29(1):153–193, 2001), the nonparametric kernel test (LWZ) by Li and Wang (J Econometrics 87(1):145–165, 1998) and Zheng (J Econ 75(2):263–289, 1996) and the nonparametric test (CHS) by Chen et al. (2017). Monte Carlo simulations are performed to evaluate the sizes and power properties of these bootstrap-based tests in finite samples over a range of bandwidth values. We find that the bootstrap-based tests are not influenced by prior restrictions on the functional form of the drift function and that the bootstrap-based CHS test has better power performance than the bootstrap-based GLR and LWZ tests in detecting a parametric form of volatility. An empirical study on weekly treasury bill rate is further conducted to demonstrate these bootstrap-based test procedures.

Suggested Citation

  • Tianshun Yan & Liping Zhang, 2020. "A comparative study of several bootstrap-based tests for the volatility in continuous-time diffusion models," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 19(1), pages 33-47, January.
    • Handle: RePEc:spr:portec:v:19:y:2020:i:1:d:10.1007_s10258-019-00157-0
    DOI: 10.1007/s10258-019-00157-0
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    References listed on IDEAS

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    1. Fan J. & Zhang C., 2003. "A Reexamination of Diffusion Estimators With Applications to Financial Model Validation," Journal of the American Statistical Association, American Statistical Association, vol. 98, pages 118-134, January.
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    More about this item

    Keywords

    Continuous-time diffusion models; Generalized likelihood ratio test; Nonparametric kernel test; Bootstrap; Treasury bill rate;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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