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Testing the maximal rank of the volatility process for continuous diffusions observed with noise

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In this paper, we present a test for the maximal rank of the volatility process in continuous diffusion models observed with noise. Such models are typically applied in mathematical finance, where latent price processes are corrupted by microstructure noise at ultra high frequencies. Using high frequency observations we construct a test statistic for the maximal rank of the time varying stochastic volatility process. Our methodology is based upon a combination of a matrix perturbation approach and pre-averaging. We will show the asymptotic mixed normality of the test statistic and obtain a consistent testing procedure.
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider41
StatusUdgivet - 15 dec. 2014
SerietitelCREATES Research Papers


  • Continuous Itô semimartingales, High frequency data, Microstructure noise, Rank tesing, Stable convergence

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