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A Testing Procedure for Constant Parameters in Stochastic Volatility Models

Author

Listed:
  • Juan Hoyo

    (Universidad Autónoma de Madrid)

  • Guillermo Llorente

    (Universidad Autónoma de Madrid)

  • Carlos Rivero

    (Universidad Complutense de Madrid)

Abstract

This paper proposes a two-step method for an omnibus misspecification test for constant parameters in the volatility equation of stochastic volatility models. The proposed test has a well-known null asymptotic distribution free of nuisance parameters. It is easy to implement and has low computational cost. Monte Carlo simulations support the relevance of the proposed method, evaluate the performance of the procedure, and highlight its small computational load. An empirical application shows the relevance of the procedure.

Suggested Citation

  • Juan Hoyo & Guillermo Llorente & Carlos Rivero, 2020. "A Testing Procedure for Constant Parameters in Stochastic Volatility Models," Computational Economics, Springer;Society for Computational Economics, vol. 56(1), pages 163-186, June.
    • Handle: RePEc:kap:compec:v:56:y:2020:i:1:d:10.1007_s10614-019-09892-0
    DOI: 10.1007/s10614-019-09892-0
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