The 'Devil's Horns' Problem of Inverting Confluent Characteristic Functions

Posted: 15 Jan 2012

See all articles by Karim M. Abadir

Karim M. Abadir

Imperial College Business School

Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Date Written: 1997

Abstract

We warn of a class of problems that occur when inverting some Characteristic Functions (CFs) which we term confluent. Confluences can arise in joint CFs during the derivation of the marginal density of some lower-dimensional combination of the components. We illustrate with a simple (yet common) autoregressive model. We show that both numerical and analytical inversions of the currently-available CFs can lead to inaccuracies in the form of a sharp spike on each tail of the statistics' densities. These twin spikes are akin to devil's horns.

Suggested Citation

Abadir, Karim M. and Rockinger, Georg Michael, The 'Devil's Horns' Problem of Inverting Confluent Characteristic Functions (1997). Econometrica, Vol. 65, No. 5, September 1997. Available at SSRN: https://ssrn.com/abstract=1985512

Karim M. Abadir (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www3.imperial.ac.uk/portal/page?_pageid=61,629646&_dad=portallive&_schema=PORTALLIVE

Georg Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41 21 728 3348 (Phone)
+41+21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/mrockinger

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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