Corradi, Valentina and Distaso, Walter (2004) Estimating and testing stochastic volatility models using realized measures. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

This paper proposes a procedure to test for the correct specification of the functional form of the volatility process, within the class of eigenfunction stochastic volatility models (Meddahi, 2001). The procedure is based on the comparison of the moments of realized volatility measures with the corresponding ones of integrated volatility implied by the model under the null hypothesis. We first provide primitive conditions on the measurement error associated with the realized measure, which allow to construct asymptotically valid specification tests. Then we establish regularity conditions under which realized volatility, bipower variation (Barndorff-Nielsen & Shephard, 2004d), and modified subsampled realized volatility (Zhang, Mykland & Aït Sahalia, 2003), satisfy the given primitive assumptions. Finally, we provide an empirical illustration based on three stock from the Dow Jones Industrial Average.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Moments method (Statistics), Eigenfunctions, Stochastic analysis, Dow Jones industrial average
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	October 2004
Number:	No.04-
Number of Pages:	49
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Economic and Social Research Council (Great Britain) (ESRC)
Grant number:	R000230006 (ESRC)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1783

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