Two-step estimation of the volatility functions in diffusion models with empirical applications

In this article, we develop a two-step estimation procedure for the volatility function in diffusion models. We firstly estimate the volatility series at sampling time points based on high-frequency data. Then, the volatility function estimator can be obtained by using the kernel smoothing method. The resulting estimators are presented based on high-frequency data, and are shown to be consistent and asymptotically normal. We also consider boundary issues and then propose two methods to handle them. The asymptotic normality of two boundary-corrected estimators is established under some suitable conditions. The proposed estimators are illustrated by Monte Carlo simulations and real data. (C) 2015 Elsevier B.V. All rights reserved.