ABC of SV: Limited Information Likelihood Inference in Stochastic Volatility Jump-Diffusion Models

Michael Creel () and Dennis Kristensen
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Michael Creel: Universitat Autònoma de Barcelona and MOVE, Postal: Dep. of Economics and Economic History, Edifici B, Universitat Autonoma de Barcelona, 08193 Bellaterra, Spain

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

Abstract: We develop novel methods for estimation and filtering of continuous-time models with stochastic volatility and jumps using so-called Approximate Bayesian Computation which build likelihoods based on limited information. The proposed estimators and filters are computationally attractive relative to standard likelihood-based versions since they rely on low-dimensional auxiliary statistics and so avoid computation of high-dimensional integrals. Despite their computational simplicity, we find that estimators and filters perform well in practice and lead to precise estimates of model parameters and latent variables. We show how the methods can incorporate intra-daily information to improve on the estimation and filtering. In particular, the availability of realized volatility measures help us in learning about parameters and latent states. The method is employed in the estimation of a flexible stochastic volatility model for the dynamics of the S&P 500 equity index. We find evidence of the presence of a dynamic jump rate and in favor of a structural break in parameters at the time of the recent financial crisis. We find evidence that possible measurement error in log price is small and has little effect on parameter estimates. Smoothing shows that, recently, volatility and the jump rate have returned to the low levels of 2004-2006.

Keywords: Approximate Bayesian Computation; continuous-time processes; filtering; indirect inference; jumps; realized volatility; stochastic volatility (search for similar items in EconPapers)
JEL-codes: C13 C14 C15 C33 G17 (search for similar items in EconPapers)
Pages: 43
Date: 2014-08-11
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: ABC of SV: Limited information likelihood inference in stochastic volatility jump-diffusion models (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2014-30

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