Continuous Time Model Estimation

Sydney U. of Technology Finance and Economics Working Paper No. 138

15 Pages Posted: 11 Aug 2005

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Shenhuai Gao

University of Sydney Business School

Date Written: December 2004

Abstract

This paper introduces an easy to follow method for continuous time model estimation. It serves as an introduction on how to convert a state space model from continuous time to discrete time, how to decompose a hybrid stochastic model into a trend model plus a noise model, how to estimate the trend model by simulation, and how to calculate standard errors from estimation of the noise model. It also discusses the numerical difficulties involved in discrete time models that bring about the unit roots illusion in econometrics.

Keywords: Continuous time model, Estimation, Trend and noise decomposition, Unit roots illusion

JEL Classification: C13, C22, C32, C51

Suggested Citation

Chiarella, Carl and Gao, Shenhuai, Continuous Time Model Estimation (December 2004). Sydney U. of Technology Finance and Economics Working Paper No. 138, Available at SSRN: https://ssrn.com/abstract=773824 or http://dx.doi.org/10.2139/ssrn.773824

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
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HOME PAGE: http://www.business.uts.edu.au/finance/

Shenhuai Gao

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

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