Testing for One-Factor Models versus Stochastic Volatility Models



2.2 Limiting Behavior of the Statistic

We can now establish the limiting distribution of the proposed test statistics based on Zn,m,r ,
defined in (3), for both the cases where
n = m and m/n 0, as m, n →∞.

Theorem 1. Let Assumption 1 hold.

Under H0,

(i)a if, as n,m, ξ-1 → ∞, n → ∞ and for any arbitrarily small ε > 0, n1 /2+εξn 0, and if
m = n, then, pointwise in r (0, 1)

Zn,r -→ Zr - MN (θ, 2 [σ4(a) LX(r, a)(LX,a)- LX(r, a)) da} ,        (6)

               LX (1, a)

where Zn,r Zn,n,r and

ɪɪ r         2

LX(r,a) = ψim ψ σ2(a)1 {Xu[α,α+ψ]}σ (Xu)du

denotes the standardized local time of the process Xt .

(i)b Define Zn = maxj=1 ,...,J Zn,rj and Z = maxj∙=1 ,...,J Zrj , where 0 < r 1 < ... < rj-1 <
r
j < . . . < rJ < 1, for j =1, . . . , J, with J arbitrarily large but finite. If, as n, m, ξn-1 →∞,
n → ∞, and, for any ε > 0 arbitrarily small, n1 /2+εξn 0, and if m = n, then

Zn -→ Z,

with


Zr1

Zr 2

.

.

.

ZrJ


/ /

- MN 0,


V (r1,r1)

V (r2,r1)


V (rJ, r1)


V(r1,r2) .. . V(r1,rJ)

V (r2,r2) ... V (r2 ,rJ)
..                          ..                              ..

.                                  ..

V(rJ, r2) . . . V(rJ,rJ)


(7)


where r,r',

V ( r,r' ) = V ( r ,r) = 2 [ σ4 (a)


LX (min( r, r' ) ,a )( LX (1 ,a ) - LX (min( r, r' ) ,a ))d

LX (1 ,a )                     a.

(i)c If, as n, m, ξn 1 → ∞, n → ∞ and n 0, and, for any ε > 0 arbitrarily small, m/n1 ε

0, then


Zn,m,r -dZMr - MN 0,2 σ4 (a) LX(r, a)da .



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