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LOCAL INSTRUMENTAL VARIABLE METHOD FOR THE GENERALIZED ADDITIVE-INTERACTIVE NONLINEAR VOLATILITY 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 separable nonparametric volatility model that includes second-order interaction terms in both mean and conditional variance functions. This is a very flexible nonparametric ARCH model that can potentially explain the behavior of the wide variety of financial assets. The model is estimated using the generalized version of the local instrumental variable estimation method first introduced in Kim and Linton (2004, Econometric Theory 20, 1094–1139). This method is computationally more effective than most other nonparametric estimation methods that can potentially be used to estimate components of such a model. Asymptotic behavior of the resulting estimators is investigated and their asymptotic normality is established. Explicit expressions for asymptotic means and variances of these estimators are also obtained.

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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