Asymptotically distribution-free tests for the volatility function of a diffusion

作者：Chen, Qiang; Zheng, Xu^*; Pan, Zhiyuan

来源：Journal of Econometrics, 2015, 184(1): 124-144.

DOI：10.1016/j.jeconom.2014.06.020

• Distribution-free tests
• Volatility function
• Diffusion model
• Martingale transformation
• Monte Carlo simulations
• Interest rate volatility

This paper develops two tests for parametric volatility function of a diffusion model based on Khmaladze (1981)'s martingale transformation. The tests impose no restrictions on the functional form of the drift function and are shown to be asymptotically distribution-free. The tests are consistent against a large class affixed alternatives and have nontrivial power against a class of root-n local alternatives. The paper also extends the tests of volatility to testing for joint specifications of drift and volatility. Monte Carlo simulations show that the tests perform well in finite samples. The proposed tests are then applied to testing models of short-term interest, using data of Treasury bill rate and Eurodollar deposit rate. The empirical results show that the commonly used CKLS volatility function of Chan et al. (1992) fits volatility function poorly and none of the parametric interest rate models considered in the paper fit data well.

• 出版日期2015-1
• 单位上海交通大学; 上海财经大学