Nonparametric Estimation and Misspecification Testing of Diffusion Models
University College London; University of Aarhus - CREATES; Cemmap (Centre for Microdata Methods and Practice)
November 5, 2007
CREATES Research Paper 2007-1
A nonparametric kernel estimator of the drift (diffusion) term in a diffusion model are developed given a preliminary parametric estimator of the diffusion (drift) term. Under regularity conditions, rates of convergence and asymptotic normality of the nonparametric estimators are established. We develop mis-specification tests of parametric diffusion models based on the nonparametric estimators, and derive the asymptotic properties of the tests. We also propose a Markov Bootstrap method for the test statistics to improve on the finite-sample approximations. The finite sample properties of the estimators are examined in a simulation study.
Number of Pages in PDF File: 33
Keywords: Diffusion, fixed-time distance asymptotics, kernel estimation, misspecification test, nonparametric
JEL Classification: C14, C22working papers series
Date posted: June 20, 2008
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