On the applicability of stochastic volatility models

The applicability of the stochastic volatility (SV) model and the SV model with jumps for US. Treasury Bill yields data is investigated. The transformation of the continuous time models into regression models is considered and their error terms are examined. The applicability of the continuous time models to the real data is assessed by comparing some atypical properties of such error terms with an application to the real data and the generated data from the models. The empirical results indicate that the SV model and the SV model with jumps are not applicable to modeling the daily/weekly released US T-Bill secondary market yields data. Some trends and correlation structure are detected to exist in the error terms of the transformed regression models for the daily/weekly released US T-Bill yields data, while the error terms of the continuous time models are supposed to be uncorrelated. These results suggest that alternative models are needed to model such T-Bill yields data.