Estimation of Continuous-Time Models with an Application to Equity Volatility Dynamics

28 Pages Posted: 19 Mar 2005

See all articles by Nengjiu Ju

Nengjiu Ju

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Gurdip Bakshi

Temple University - Fox School of Business and Management; Fox School of Business

Hui Ou-Yang

Cheung Kong Graduate School of Business

Date Written: January 24, 2005

Abstract

The treatment of this article renders closed-form density approximation feasible for univariate continuous-time models. Implementation methodology depends directly on the parametric-form of the drift and the diffusion of the primitive process and not on its transformation to a unit-variance process. Offering methodological convenience, the approximation method relies on numerically evaluating one-dimensional integrals and circumvents existing dependence on intractable multidimensional integrals. Density-based inferences can now be drawn for a broader set of models of equity volatility. Our empirical results provide insights on crucial outstanding issues related to the rank-orderings of continuous-time stochastic volatility models, the absence/presence of non-linearities in the drift function, and the desirability of pursuing more flexible diffusion function specifications.

Keywords: Continuous-time models, Maximum-likelihood estimation, Density approximation

JEL Classification: G10, G11, G12, G13, C15, C32, C52

Suggested Citation

Ju, Nengjiu and Bakshi, Gurdip S. and Ou-Yang, Hui, Estimation of Continuous-Time Models with an Application to Equity Volatility Dynamics (January 24, 2005). Available at SSRN: https://ssrn.com/abstract=686411 or http://dx.doi.org/10.2139/ssrn.686411

Nengjiu Ju (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Gurdip S. Bakshi

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Hui Ou-Yang

Cheung Kong Graduate School of Business ( email )

Hong Kong
China
852-5199-6227 (Phone)

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