Limit experiments of GARCH
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Abstract: GARCH is one of the most prominent nonlinear time series models, both widely applied and thoroughly studied. Recently, it has been shown that the COGARCH model (which was introduced a few years ago by Kl"{u}ppelberg, Lindner and Maller) and Nelson's diffusion limit are the only functional continuous-time limits of GARCH in distribution. In contrast to Nelson's diffusion limit, COGARCH reproduces most of the stylized facts of financial time series. Since it has been proven that Nelson's diffusion is not asymptotically equivalent to GARCH in deficiency, in the present paper, we investigate the relation between GARCH and COGARCH in Le Cam's framework of statistical equivalence. We show that GARCH converges generically to COGARCH, even in deficiency, provided that the volatility processes are observed. Hence, from a theoretical point of view, COGARCH can indeed be considered as a continuous-time equivalent to GARCH. Otherwise, when the observations are incomplete, GARCH still has a limiting experiment, which we call MCOGARCH, which is not equivalent, but nevertheless quite similar, to COGARCH. In the COGARCH model, the jump times can be more random than for the MCOGARCH, a fact practitioners may see as an advantage of COGARCH.
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- Asymptotic equivalence of discretely observed diffusion processes and their Euler scheme: small variance case
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- GARCH modelling in continuous time for irregularly spaced time series data
- Statistical inference for nonparametric GARCH models
- The COGARCH: a review, with news on option pricing and statistical inference
- Asymptotic equivalence for inhomogeneous jump diffusion processes and white noise
- The continuous limit of weak GARCH
- Asymptotic equivalence for pure jump Lévy processes with unknown Lévy density and Gaussian white noise
- Statistical convergence of Markov experiments to diffusion limits
- Le Cam theory on the comparison of statistical models
- Higher moments and prediction-based estimation for the COGARCH(1,1) model
- The story of GARCH: a personal odyssey
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