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Stochastic volatility: likelihood inference and comparison with ARCH models. The Review of Economic Studies
, 1998
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Forecast Evaluation and Combination
 IN G.S. MADDALA AND C.R. RAO (EDS.), HANDBOOK OF STATISTICS
, 1996
"... It is obvious that forecasts are of great importance and widely used in economics and finance. Quite simply, good forecasts lead to good decisions. The importance of forecast evaluation and combination techniques follows immediately forecast users naturally have a keen interest in monitoring and ..."
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Cited by 140 (29 self)
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It is obvious that forecasts are of great importance and widely used in economics and finance. Quite simply, good forecasts lead to good decisions. The importance of forecast evaluation and combination techniques follows immediately forecast users naturally have a keen interest in monitoring and improving forecast performance. More generally, forecast evaluation figures prominently in many questions in empirical economics and finance, such as: Are expectations rational? (e.g., Keane and Runkle, 1990; Bonham and Cohen, 1995) Are financial markets efficient? (e.g., Fama, 1970, 1991) Do macroeconomic shocks cause agents to revise their forecasts at all horizons, or just at short and mediumterm horizons? (e.g., Campbell and Mankiw, 1987; Cochrane, 1988) Are observed asset returns &quot;too volatile&quot;? (e.g., Shiller, 1979; LeRoy and Porter, 1981) Are asset returns forecastable over long horizons? (e.g., Fama and French, 1988; Mark, 1995)
Surrogate time series
 PHYSICA D
, 2000
"... Before we apply nonlinear techniques, e.g. those inspired by chaos theory, to dynamical phenomena occurring in nature, it is necessary to first ask if the use of such advanced techniques is justified by the data. While many processes in nature seem very unlikely a priori to be linear, the possible n ..."
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Cited by 135 (0 self)
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Before we apply nonlinear techniques, e.g. those inspired by chaos theory, to dynamical phenomena occurring in nature, it is necessary to first ask if the use of such advanced techniques is justified by the data. While many processes in nature seem very unlikely a priori to be linear, the possible nonlinear nature might not be evident in specific aspects of their dynamics. The method of surrogate data has become a very popular tool to address such a question. However, while it was meant to provide a statistically rigorous, foolproof framework, some limitations and caveats have shown up in its practical use. In this paper, recent efforts to understand the caveats, avoid the pitfalls, and to overcome some of the limitations, are reviewed and augmented by new material. In particular, we will discuss specific as well as more general approaches to constrained randomisation, providing a full range of examples. New algorithms will be introduced for unevenly sampled and multivariate data and for surrogate spike trains. The main limitation, which lies in the interpretability of the test results, will be illustrated through instructive case studies. We will also discuss some implementational aspects of the realisation of these methods in
New Insights Into Smile, Mispricing and Value At Risk: The Hyperbolic Model
 Journal of Business
, 1998
"... We investigate a new basic model for asset pricing, the hyperbolic model, which allows an almost perfect statistical fit of stock return data. After a brief introduction into the theory supported by an appendix we use also secondary market data to compare the hyperbolic model to the classical Black ..."
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Cited by 123 (7 self)
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We investigate a new basic model for asset pricing, the hyperbolic model, which allows an almost perfect statistical fit of stock return data. After a brief introduction into the theory supported by an appendix we use also secondary market data to compare the hyperbolic model to the classical BlackScholes model. We study implicit volatilities, the smile effect and the pricing performance. Exploiting the full power of the hyperbolic model, we construct an option value process from a statistical point of view by estimating the implicit riskneutral density function from option data. Finally we present some new valueat risk calculations leading to new perspectives to cope with model risk. I Introduction There is little doubt that the BlackScholes model has become the standard in the finance industry and is applied on a large scale in everyday trading operations. On the other side its deficiencies have become a standard topic in research. Given the vast literature where refinements a...
Automated Inference and Learning in Modeling Financial Volatility”, Econometric Theory
, 2005
"... This paper uses the SpecifictoGeneral methodological approach that is widely used in science, in which problems with existing theories are resolved as the need arises, to illustrate a number of important developments in the modelling of univariate and multivariate financial volatility. Twenty freq ..."
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Cited by 104 (75 self)
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This paper uses the SpecifictoGeneral methodological approach that is widely used in science, in which problems with existing theories are resolved as the need arises, to illustrate a number of important developments in the modelling of univariate and multivariate financial volatility. Twenty frequently arising issues in analysing timevarying univariate and multivariate conditional volatility and stochastic volatility are discussed. In view of some of these difficulties, including the number of parameters to be estimated, and the computational complexities associated with multivariate conditional volatility models and both univariate and multivariate stochastic volatility models, automated inference is argued to be unhelpful to modelling in empirical financial econometrics. Some suggestions for future research are also presented. *The author wishes to acknowledge helpful discussions with Manabu Asai, Massimiliano
Testing Parametric Conditional Distributions of Dynamic Models
 Review of Economics and Statistics
, 2003
"... 1I thank two anonymous referees and an editor for their valuable comments which help clarify many issues and lead to a much better presentation. All errors are my own responsibility. Partial ..."
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Cited by 83 (2 self)
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1I thank two anonymous referees and an editor for their valuable comments which help clarify many issues and lead to a much better presentation. All errors are my own responsibility. Partial
Functionalcoefficient Regression Models for Nonlinear Time Series
 Journal of the American Statistical Association
, 1998
"... We apply the local linear regression technique for estimation of functionalcoefficient regression models for time series data. The models include threshold autoregressive models (Tong 1990) and functionalcoefficient autoregressive models (Chen and Tsay 1993) as special cases but with the added adv ..."
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Cited by 74 (13 self)
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We apply the local linear regression technique for estimation of functionalcoefficient regression models for time series data. The models include threshold autoregressive models (Tong 1990) and functionalcoefficient autoregressive models (Chen and Tsay 1993) as special cases but with the added advantages such as depicting finer structure of the underlying dynamics and better postsample forecasting performance. We have also proposed a new bootstrap test for the goodness of fit of models and a bandwidth selector based on newly defined crossvalidatory estimation for the expected forecasting errors. The proposed methodology is dataanalytic and is of appreciable flexibility to analyze complex and multivariate nonlinear structures without suffering from the "curse of dimensionality". The asymptotic properties of the proposed estimators are investigated under the ffmixing condition. Both simulated and real data examples are used for illustration. Key Words: ffmixing; Asymptotic normali...
Dependence Structures for Multivariate HighFrequency Data in Finance. Quantitative Finance 3
, 2003
"... www.math.ethz.ch/finance Stylised facts for univariate high–frequency data in finance are well–known. They include scaling behaviour, volatility clustering, heavy tails, and seasonalities. The multivariate problem, however, has scarcely been addressed up to now. In this paper, bivariate series of hi ..."
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Cited by 73 (4 self)
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www.math.ethz.ch/finance Stylised facts for univariate high–frequency data in finance are well–known. They include scaling behaviour, volatility clustering, heavy tails, and seasonalities. The multivariate problem, however, has scarcely been addressed up to now. In this paper, bivariate series of high–frequency FX spot data for major FX markets are investigated. First, as an indispensable prerequisite for further analysis, the problem of simultaneous deseasonalisation of high–frequency data is addressed. In the bulk of the paper we analyse in detail the dependence structure as a function of the time scale. Particular emphasis is put on the tail behaviour, which is investigated by means of copulas and spectral measures. 1
Complete Models with Stochastic Volatility
, 1996
"... The paper proposes an original class of models for the continuous time price process of a financial security with nonconstant volatility. The idea is to define instantaneous volatility in terms of exponentiallyweighted moments of historic logprice. The instantaneous volatility is therefore driven ..."
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Cited by 71 (4 self)
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The paper proposes an original class of models for the continuous time price process of a financial security with nonconstant volatility. The idea is to define instantaneous volatility in terms of exponentiallyweighted moments of historic logprice. The instantaneous volatility is therefore driven by the same stochastic factors as the price process, so that unlike many other models of nonconstant volatility, it is not necessary to introduce additional sources of randomness. Thus the market is complete and there are unique, preferenceindependent options prices. We find a partial differential equation for the price of a European Call Option. Smiles and skews are found in the resulting plots of implied volatility. Keywords: Option pricing, stochastic volatility, complete markets, smiles. Acknowledgement. It is a pleasure to thank the referees of an earlier draft of this paper whose perceptive comments have resulted in many improvements. 1 Research supported in part by Record Treasu...