Diffusion Limits of Real-Time GARCH
View / Open Files
Authors
Ding, Y.
Publication Date
2020-11-25Series
Cambridge Working Papers in Economics
Publisher
Faculty of Economics, University of Cambridge
Type
Working Paper
Previous Version(s)
Metadata
Show full item recordCitation
Ding, Y. (2020). Diffusion Limits of Real-Time GARCH. https://doi.org/10.17863/CAM.79586
Abstract
We prove that the diffusion limit of Real-Time GARCH (RT-GARCH) exists if we introduce an auxiliary process to state the system in a Markovian form. The volatility in the diffusion limit follows an Ornstein-Uhlenbeck-type process which fails to be positive with probability one. Moreover, only a degenerate diffusion limit can render an almost surely positive volatility process. As a result, we call for caution when using RT-GARCH since it lacks compatibility with existing asset pricing theories. The result also provides a new insight into how different specifications for GARCH affect its diffusion limit.
Keywords
GARCH, RT-GARCH, SV, diffusion limit
Identifiers
CWPE20112
This record's DOI: https://doi.org/10.17863/CAM.79586
This record's URL: https://www.repository.cam.ac.uk/handle/1810/332140
Statistics
Total file downloads (since January 2020). For more information on metrics see the
IRUS guide.
Recommended or similar items
The current recommendation prototype on the Apollo Repository will be turned off on 03 February 2023. Although the pilot has been fruitful for both parties, the service provider IKVA is focusing on horizon scanning products and so the recommender service can no longer be supported. We recognise the importance of recommender services in supporting research discovery and are evaluating offerings from other service providers. If you would like to offer feedback on this decision please contact us on: support@repository.cam.ac.uk