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Characteristic function estimation of Ornstein-Uhlenbeck-based stochastic volatility models

  • Emanuele Taufer

    ()

    (DISA, Faculty of Economics, Trento University)

  • Nikolai Leonenko
  • Marco Bee

Continuous-time stochastic volatility models are becoming increasingly popular in finance because of their flexibility in accommodating most stylized facts of financial time series. However, their estimation is difficult because the likelihood function does not have a closed-form expression. In this paper we propose a characteristic function-based estimation method for non-Gaussian Ornstein-Uhlenbeck-based stochastic volatility models. After deriving explicit expressions of the characteristic functions for various cases of interest we analyze the asymptotic properties of the estimators and evaluate their performance by means of a simulation experiment. Finally, a real-data application shows that the superposition of two Ornstein-Uhlenbeck processes gives a good approximation to the dependence structure of the process.

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Paper provided by Department of Computer and Management Sciences, University of Trento, Italy in its series DISA Working Papers with number 0907.

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Length: 30 pages
Date of creation: Oct 2009
Date of revision: 02 Dec 2009
Handle: RePEc:trt:disawp:0907
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