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

29 Pages Posted: 27 Jan 2006

See all articles by Hui Ou-Yang

Hui Ou-Yang

Cheung Kong Graduate School of Business

Gurdip Bakshi

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

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-ordering of continuous-time stochastic volatility models, the absence/presence of nonlinearities in the drift function of equity volatility, and the desirability of pursuing more flexible diffusion function specifications.

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

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

Suggested Citation

Ou-Yang, Hui and Bakshi, Gurdip S., Estimation of Continuous-Time Models with an Application to Equity Volatility Dynamics. Journal of Financial Economics, Forthcoming, Robert H. Smith School Research Paper No. RHS 06-017, Available at SSRN: https://ssrn.com/abstract=878253

Hui Ou-Yang

Cheung Kong Graduate School of Business ( email )

Hong Kong
China
852-5199-6227 (Phone)

Gurdip S. Bakshi (Contact Author)

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
166
Abstract Views
1,216
rank
219,454
PlumX Metrics