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Post by Sapphire Capital on Aug 19, 2008 23:49:58 GMT 4
A Range-Based Test for the Parametric Form of the Volatility in Diffusion Models Mark Podolskij University of Aarhus - School of Economics and Management Daniel Ziggel University of Bochum May 14, 2008 CREATES Research Paper 2008-22 Abstract: We propose a new test for the parametric form of the volatility function in continuous time diffusion models of the type dXt = a(t;Xt)dt (t;Xt)dWt. Our approach involves a range-based estimation of the integrated volatility and the integrated quarticity, which are used to construct the test statistic. Under rather weak assumptions on the drift and volatility we prove weak convergence of the test statistic to a centered mixed Gaussian distribution. As a consequence we obtain a test, which is consistent for any fixed alternative. We also provide a test for neighborhood hypotheses. Moreover, we present a parametric bootstrap procedure which provides a better approximation of the distribution of the test statistic. Finally, it is demonstrated by means of Monte Carlo study that the range-based test is more powerful than the return-based test when comparing at the same sampling frequency. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1148158_code357906.pdf?abstractid=1148158&mirid=3
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