Semiparametric stochastic volatility modelling using penalized splines
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Abstract: Stochastic volatility (SV) models mimic many of the stylized facts attributed to time series of asset returns, while maintaining conceptual simplicity. The commonly made assumption of conditionally normally distributed or Student-t-distributed returns, given the volatility, has however been questioned. In this manuscript, we introduce a novel maximum penalized likelihood approach for estimating the conditional distribution in an SV model in a nonparametric way, thus avoiding any potentially critical assumptions on the shape. The considered framework exploits the strengths both of the powerful hidden Markov model machinery and of penalized B-splines, and constitutes a powerful and flexible alternative to recently developed Bayesian approaches to semiparametric SV modelling. We demonstrate the feasibility of the approach in a simulation study before outlining its potential in applications to three series of returns on stocks and one series of stock index returns.
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Cited in
(9)- The split-SV model
- A measure of market volatility based on F-transform
- Spline estimation of a semiparametric GARCH model
- Splines for financial volatility
- Estimation and application of semiparametric stochastic volatility models based on kernel density estimation and hidden Markov models
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- Examining heterogeneity in implied equity risk premium using penalized splines
- A semiparametric stochastic volatility model
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