IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

A Simple Approach to the Estimation of Continuous Time CEV Stochastic Volatility Models of the Short-Term Rate

Listed author(s):
  • Fabio Fornari

    (Banca d'Italia)

  • Antonio Mele


    (Universite' de Paris X - Thema)

Aim of this article is to judge the empirical performance of 'ARCH models as diffusion approximations' of models of the short-term rate with stochastic volatility. Our estimation strategy is based both on moment conditions needed to guarantee the convergence of the discrete time models and on the quasi indirect inference principle. Unlike previous literature in which standard ARCH models approximate only specific diffusion models (those in which the variance of volatility is proportional to the square of volatility), our estimation strategy relies on ARCH models that approximate any CEV-diffusion model for volatility. A MonteCarlo study reveals that the filtering performances of these models are remarkably good, even in the presence of important misspecification. Finally, based on a natural substitute of a global specification test for just-identified problems designed within indirect inference methods, we provide strong empirical evidence that approximating diffusions with our models gives rise to a disaggregation bias that is not significant.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 397.

in new window

Date of creation: Feb 2001
Handle: RePEc:bdi:wptemi:td_397_01
Contact details of provider: Postal:
Via Nazionale, 91 - 00184 Roma

Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_397_01. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.