On the Observed-Data Deviance Information Criterion for Volatility Modeling

Chi Chun (Joshua) Chan, Angelia Grant

    Research output: Contribution to journalArticle


    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.
    Original languageEnglish
    Pages (from-to)772-802pp
    JournalJournal of Financial Econometrics
    Issue number4
    Publication statusPublished - 2016


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