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Asymptotically Optimal Smoothing with ARCH Models

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  • Daniel B. Nelson

Abstract

Suppose an observed time series is generated by a stochastic volatility model-i.e., there is an unobservable state variable controlling the volatility of the innovations in the series. As shown by Nelson (1992), and Nelson and Foster (1994), a misspecified ARCH model will often be able to consistently (as a continuous time limit is approached) estimate the unobserved volatility process, using information in the lagged residuals. This paper shows how to more efficiently estimate such a volatility process using information in both lagged and led residuals. In particular, this paper expands the optimal filtering results of Nelson and Foster (1994) and Nelson (1994) to smoothing.

Suggested Citation

  • Daniel B. Nelson, 1994. "Asymptotically Optimal Smoothing with ARCH Models," NBER Technical Working Papers 0161, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberte:0161
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    1. Ghysels, E. & Harvey, A. & Renault, E., 1995. "Stochastic Volatility," Papers 95.400, Toulouse - GREMAQ.
    2. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 2002. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 69-87, January.
    3. Melino, Angelo & Turnbull, Stuart M., 1990. "Pricing foreign currency options with stochastic volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 239-265.
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    6. Neil Shephard, 2005. "Stochastic Volatility," Economics Papers 2005-W17, Economics Group, Nuffield College, University of Oxford.
    7. Daniel B. Nelson, 1994. "Asymptotic Filtering Theory for Multivariate ARCH Models," NBER Technical Working Papers 0162, National Bureau of Economic Research, Inc.
    8. Nelson, Daniel B., 1992. "Filtering and forecasting with misspecified ARCH models I : Getting the right variance with the wrong model," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 61-90.
    9. Foster, Dean P & Nelson, Daniel B, 1996. "Continuous Record Asymptotics for Rolling Sample Variance Estimators," Econometrica, Econometric Society, vol. 64(1), pages 139-174, January.
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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