Testing for One-Factor Models versus Stochastic Volatility Models



A Proofs

Before proving Theorem 1, we need the following Lemmas.

Lemma 1. Let Assumption 1 hold. Then

sup μ(Xs) | = Oa.s. (nε/4),
s[0,1]

sup σ2(Xs) = Oa.s.(nε/2),
s[0,1]

sup g( fs) | = Oa.s. (nε/2),
s[0,1]

for any ε > 0, arbitrarily small.

A.1 Proof of Lemma 1

We start from the case when Xt follows (1). Define Rl = {inf t : |Xt| >l}. Thus, Rl is an

Ft-measurable stopping time. Let

min(t,Rl)

min(t,Rl) σ2 (Xs)dW1,s.


Xmin(t,Rl )


=         μ ( Xs )d s + /

00

Obviously, for all t Rl, Xmin(t r) = Xt. Now let Ωl = {ω : Rl > 1} and l = ln = nε/4. Thus, given
the growth conditions in Assumption 1(a),
Xt is a non-explosive diffusion, and so Pr(Ωln 1) = 1.
By a similar argument, given Assumptions 1(a), 1(b), the same holds when the volatility process
follows (2). Therefore, the statement follows.                                                     

Lemma 2. Let Assumption 1 hold. Under H0, if, as n →∞, nξn →∞, nξn2 0 and, for any
ε >
 0 arbitrarily small, m/n1 -ε 0, then, pointwise in r,

m
n


Sn2(Xi/n)


σ2(Xi/n)) - 0.


i=1


A.2 Proof of Lemma 2

By Ito’s formula

√    l ( n-1)rj

m £  ( S2n ( Xi/n ) σ 2 ( Xi/n ))

i=1

'------------------------------------------------------------------'

An,m,r

m
n


l (n- 1)rj


i=1


j=11 {Xj∕n-Xi∕nn}n (x(j+1)/n   Xj/n)      2

vn-1 1                               σ (Xi/n)

j=j =1 1 {Xj∕n-Xi∕n n}


18




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