Publication Type

Working Paper

Publication Date

11-2009

Abstract

In this paper we develop and implement a method for maximum simulated likelihood estimation of the continuous time stochastic volatility model with the constant elasticity of volatility. The approach do not require observations on option prices nor volatility. To integrate out latent volatility from the joint density of return and volatility, a modified efficient importance sampling technique is used after the continuous time model is approximated using the Euler-Maruyama scheme. The Monte Carlo studies show that the method works well and the empirical applications illustrate usefulness of the method. Empirical results provide strong evidence against the Heston model.

Keywords

Efficient importance sampler; Constant elasticity of volatility

Discipline

Applied Statistics | Econometrics

Research Areas

Econometrics

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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