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NONPARAMETRIC ESTIMATION OF VOLATILITY FUNCTIONS: THE LOCAL EXPONENTIAL ESTIMATOR

Published online by Cambridge University Press:  17 May 2002

Flavio A. Ziegelmann
Affiliation:
University of Kent at Canterbury and Universidade Federal do Rio Grande do Sul

Abstract

Kernel smoothing techniques free the traditional parametric estimators of volatility from the constraints related to their specific models. In this paper the nonparametric local exponential estimator is applied to estimate conditional volatility functions, ensuring its nonnegativity. Its asymptotic properties are established and compared with those for the local linear estimator. It theoretically enables us to determine when the exponential is expected to be superior to the linear estimator. A very strong and novel result is achieved: the exponential estimator is asymptotically fully adaptive to unknown conditional mean functions. Also, our simulation study shows superior performance of the exponential estimator.

Type
MISCELLANEA
Copyright
© 2002 Cambridge University Press

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