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LOCAL INSTRUMENTAL VARIABLE METHOD FOR THEGENERALIZED ADDITIVE-INTERACTIVE NONLINEARVOLATILITY MODEL ESTIMATION

Published online by Cambridge University Press:  20 January 2012

Michael Levine  and
Jinguang Li
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Abstract

In this article we consider a new separablenonparametric volatility model that includessecond-order interaction terms in both mean andconditional variance functions. This is a veryflexible nonparametric ARCH model that canpotentially explain the behavior of the wide varietyof financial assets. The model is estimated usingthe generalized version of the local instrumentalvariable estimation method first introduced in Kimand Linton (2004, Econometric Theory20, 1094–1139). This method is computationally moreeffective than most other nonparametric estimationmethods that can potentially be used to estimatecomponents of such a model. Asymptotic behavior ofthe resulting estimators is investigated and theirasymptotic normality is established. Explicitexpressions for asymptotic means and variances ofthese estimators are also obtained.

Information

Type
Research Article
Information
Econometric Theory , Volume 28 , Issue 3 , June 2012 , pp. 629 - 669
Copyright
Copyright © Cambridge University Press 2011

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