Department of Economics and Business Economics

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.
Original languageDanish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages41
Publication statusPublished - 15 Dec 2014
SeriesCREATES Research Papers
Number2014-52

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