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Class of Semiparametric Volatility Models with Applications to Financial Time Series

Title: A Class of Semiparametric Volatility Models with Applications to Financial Time Series.
Name(s): Chung, Steve S., author
Niu, Xu-Feng, professor directing dissertation
Gallivan, Kyle, university representative
Sinha, Debajyoti, committee member
Wu, Wei, committee member
Department of Statistics, degree granting department
Florida State University, degree granting institution
Type of Resource: text
Genre: Text
Issuance: monographic
Date Issued: 2014
Publisher: Florida State University
Florida State University
Place of Publication: Tallahassee, Florida
Physical Form: computer
online resource
Extent: 1 online resource
Language(s): English
Abstract/Description: The autoregressive conditional heteroskedasticity (ARCH) and generalized autoregressive conditional heteroskedasticity (GARCH) models take the dependency of the conditional second moments. The idea behind ARCH/GARCH model is quite intuitive. For ARCH models, past squared innovations describes the present squared volatility. For GARCH models, both squared innovations and the past squared volatilities define the present volatility. Since their introduction, they have been extensively studied and well documented in financial and econometric literature and many variants of ARCH/GARCH models have been proposed. To list a few, these include exponential GARCH(EGARCH), GJR-GARHCH(or threshold GARCH), integrated GARCH(IGARCH), quadratic GARCH(QGARCH), and fractionally integrated GARCH(FIGARCH). The ARCH/GARCH models and their variant models have gained a lot of attention and they are still popular choice for modeling volatility. Despite their popularity, they suffer from model flexibility. Volatility is a latent variable and hence, putting a specific model structure violates this latency assumption. Recently, several attempts have been made in order to ease the strict structural assumptions on volatility. Both nonparametric and semiparametric volatility models have been proposed in the literature. We review and discuss these modeling techniques in detail. In this dissertation, we propose a class of semiparametric multiplicative volatility models. We define the volatility as a product of parametric and nonparametric parts. Due to the positivity restriction, we take the log and square transformations on the volatility. We assume that the parametric part is GARCH(1,1) and it serves as a initial guess to the volatility. We estimate GARCH(1,1) parameters by using conditional likelihood method. The nonparametric part assumes an additive structure. There may exist some loss of interpretability by assuming an additive structure but we gain flexibility. Each additive part is constructed from a sieve of Bernstein basis polynomials. The nonparametric component acts as an improvement for the parametric component. The model is estimated from an iterative algorithm based on boosting. We modified the boosting algorithm (one that is given in Friedman 2001) such that it uses a penalized least squares method. As a penalty function, we tried three different penalty functions: LASSO, ridge, and elastic net penalties. We found that, in our simulations and application, ridge penalty worked the best. Our semiparametric multiplicative volatility model is evaluated using simulations and applied to the six major exchange rates and SP 500 index. The results show that the proposed model outperforms the existing volatility models in both in-sample estimation and out-of-sample prediction.
Identifier: FSU_migr_etd-8756 (IID)
Submitted Note: A Dissertation submitted to the Department of Statistics in partial fulfillment of the requirements for the degree of Doctor of Philosophy.
Degree Awarded: Spring Semester, 2014.
Date of Defense: April 1, 2014.
Keywords: Bernstein Basis Polynomials, Semiparametric models, Time Series, Volatility
Bibliography Note: Includes bibliographical references.
Advisory Committee: Xu-Feng Niu, Professor Directing Dissertation; Kyle Gallivan, University Representative; Debajyoti Sinha, Committee Member; Wei Wu, Committee Member.
Subject(s): Statistics
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Host Institution: FSU

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Chung, S. S. (2014). A Class of Semiparametric Volatility Models with Applications to Financial Time Series. Retrieved from