Conditional Estimation of Diffusion Processes

47 Pages Posted: 24 Jun 2003

See all articles by Minqiang Li

Minqiang Li

Bloomberg LP

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: November 14, 2002

Abstract

There are a number of circumstances in finance where it is useful to estimate diffusion processes conditional on some event. In this paper, we develop the theoretical and numerical tools necessary to perform conditional estimation of diffusion processes within a generalized method of moments framework. We illustrate our method by estimating a univariate diffusion process for a standard time-series of interest rate data conditioned to remain between lower and upper boundaries. A test statistic fails to reject by a wide margin the linearity of the conditionally estimated drift coefficient.

JEL Classification: G10, G12, G13, G19

Suggested Citation

Li, Minqiang and Pearson, Neil D. and Poteshman, Allen M., Conditional Estimation of Diffusion Processes (November 14, 2002). Available at SSRN: https://ssrn.com/abstract=410189 or http://dx.doi.org/10.2139/ssrn.410189

Minqiang Li (Contact Author)

Bloomberg LP ( email )

731 Lexington Avenue
New York, NY 10022
United States

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance ( email )

340 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-265-0565 (Phone)
217-244-3102 (Fax)

HOME PAGE: http://www.business.uiuc.edu/poteshma

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