A Realized Stochastic Volatility Model With Box–Cox Transformation
Tingguo Zheng, Tao Song
Journal of Business & Economic Statistics Vol. 32, No. 4
#002302 20160221 ()
This article presents a new class of realized stochastic volatility model based on realized volatilities and returns jointly. We generalize the traditionally used logarithm transformation of realized volatility to the Box–Cox transformation, a more flexible parametric family of transformations. A two-step maximum likelihood estimation procedure is introduced to estimate this model on the basis of Koopman and Scharth (2013). Simulation results show that the two-step estimator performs well, and the misspecified log transformation may lead to inaccurate parameter estimation and certain excessive skewness and kurtosis. Finally, an empirical investigation on realized volatility measures and daily returns is carried out for several stock indices.
Keywords: Model misspecification; Realized volatility; State space model; Stock return; Two-step estimation.

Download full text