Testing the local volatility assumption: a statistical approach

Mark Podolskij () and Mathieu Rosenbaum ()
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Mathieu Rosenbaum: École Polytechnique Paris

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In practice, the choice of using a local volatility model or a stochastic volatility model is made according to their respective ability to fit implied volatility surfaces. In this paper, we adopt an opposite point of view. Indeed, based on historical data, we design a statistical procedure aiming at testing the assumption of a local volatility model for the price dynamics, against the alternative of a stochastic volatility model.

Keywords: Local Volatility Models; Stochastic Volatility Models; Test Statistics; Semi-Martingales; Limit Theorems. (search for similar items in EconPapers)
JEL-codes: C10 C13 C14 (search for similar items in EconPapers)
Pages: 15
Date: 2011-01-13
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Testing the local volatility assumption: a statistical approach (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2011-04

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