Nonparametric autoregression with multiplicative volatility and additive mean

Lijian Yang, Wolfgang Härdle and Jens P. Nielsen

No 1998,107, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: For over a decade, nonparametric modelling has been successfully applied to study nonlinear structures in financial time series. It is well known that the usual nonparametric models often have less than satisfactory performance when dealing with more than one lag. When the mean has an additive structure, however, better estimation methods are available which fully exploit such a structure. Although in the past such nonparametric applications had been focused more on the estimation of the conditional mean, it is equally if not more important to measure the future risk of the series along with the mean. For the volatility function, i.e., the conditional variance given the past, a multiplicative structure is more appropriate than an additive one, as the volatility is a positive scale function and a multiplicative model provides a better interpretation of each lagged value's influence on such a function. In this paper we consider the joint estimation of both the additive mean and the multiplicative volatility. The technique used is marginally integrated local polynomial estimation. The procedure is applied to the DEM/USD (Deutsche Mark/US Dollar) daily exchange returns.

Keywords: Additive Mean; Geometric Ergodicity; Geometric Mixing; Local Polynomial Regression; Marginal Integration; Multiplicative Volatility; Stationary Probability Density (search for similar items in EconPapers)
Date: 1998
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Related works:
Journal Article: Nonparametric Autoregression with Multiplicative Volatility and Additive mean (1999)
Working Paper: Nonparametric Autoregression with Multiplicative Volatility and Additive Mean (1996)
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