TY - JOUR
T1 - On the Observed-Data Deviance Information Criterion for Volatility Modeling
AU - Chan, Chi Chun (Joshua)
AU - Grant, Angelia
PY - 2016
Y1 - 2016
N2 - We propose importance sampling algorithms based on fast band matrix routines for estimating the observed-data likelihoods for a variety of stochastic volatility models. This is motivated by the problem of computing the deviance information criterion (DIC)-a popular Bayesian model comparison criterion that comes in a few variants. Although the DIC based on the conditional likelihood-obtained by conditioning on the latent variables-is widely used for comparing stochastic volatility models, recent studies have argued against its use on both theoretical and practical grounds. Indeed, we show via a Monte-Carlo study that the conditional DIC tends to favor overfitted models, whereas the DIC based on the observed-data likelihood-calculated using the proposed importance sampling algorithms-seems to perform well. We demonstrate the methodology with an application involving daily returns on the Standard & Poors 500 index.
AB - We propose importance sampling algorithms based on fast band matrix routines for estimating the observed-data likelihoods for a variety of stochastic volatility models. This is motivated by the problem of computing the deviance information criterion (DIC)-a popular Bayesian model comparison criterion that comes in a few variants. Although the DIC based on the conditional likelihood-obtained by conditioning on the latent variables-is widely used for comparing stochastic volatility models, recent studies have argued against its use on both theoretical and practical grounds. Indeed, we show via a Monte-Carlo study that the conditional DIC tends to favor overfitted models, whereas the DIC based on the observed-data likelihood-calculated using the proposed importance sampling algorithms-seems to perform well. We demonstrate the methodology with an application involving daily returns on the Standard & Poors 500 index.
U2 - 10.1093/jjfinec/nbw002
DO - 10.1093/jjfinec/nbw002
M3 - Article
SN - 1479-8409
VL - 14
SP - 772
EP - 802
JO - Journal of Financial Econometrics
JF - Journal of Financial Econometrics
IS - 4
ER -