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Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models

Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models In this paper, Markov chain Monte Carlo sampling methods are exploited to provide a unified, practical likelihood-based framework for the analysis of stochastic volatility models. A highly effective method is developed that samples all the unobserved volatilities at once using an approximating offset mixture model, followed by an importance reweighting procedure. This approach is compared with several alternative methods using real data. The paper also develops simulation-based methods for filtering, likelihood evaluation and model failure diagnostics. The issue of model choice using non-nested likelihood ratios and Bayes factors is also investigated. These methods are used to compare the fit of stochastic volatility and GARCH models. All the procedures are illustrated in detail. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models

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References (70)

Publisher
Oxford University Press
Copyright
© Published by Oxford University Press.
Subject
Articles
ISSN
0034-6527
eISSN
1467-937X
DOI
10.1111/1467-937X.00050
Publisher site
See Article on Publisher Site

Abstract

In this paper, Markov chain Monte Carlo sampling methods are exploited to provide a unified, practical likelihood-based framework for the analysis of stochastic volatility models. A highly effective method is developed that samples all the unobserved volatilities at once using an approximating offset mixture model, followed by an importance reweighting procedure. This approach is compared with several alternative methods using real data. The paper also develops simulation-based methods for filtering, likelihood evaluation and model failure diagnostics. The issue of model choice using non-nested likelihood ratios and Bayes factors is also investigated. These methods are used to compare the fit of stochastic volatility and GARCH models. All the procedures are illustrated in detail.

Journal

The Review of Economic StudiesOxford University Press

Published: Jul 1, 1998

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