Nonparametric Transition-Based Tests for Jump-Diffusions

54 Pages Posted: 11 Jan 2007

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jianqing Fan

Princeton University - Bendheim Center for Finance

Heng Peng

Hong Kong Baptist University (HKBU)

Date Written: July 2005

Abstract

We develop a specification test for discretely-sampled jump-diffusions, based on a comparison of a nonparametric estimate of the transition density or distribution function to their corresponding parametric counterparts. As a special case, our method applies to pure diffusions. We propose three different discrepancy measures between the null and alternative transition density and distribution functions. We establish the asymptotic null distributions of proposed test statistics and compute their power functions. The finite sample properties are investigated via simulation studies and are compared with those of alternative tests.

Keywords: Generalized likelihood ratio tests, local linear fit, null distribution, jump-diffusions, Markovian processes, power, specification tests, transition density

JEL Classification: C52, G19

Suggested Citation

Ait-Sahalia, Yacine and Fan, Jianqing and Peng, Heng, Nonparametric Transition-Based Tests for Jump-Diffusions (July 2005). Available at SSRN: https://ssrn.com/abstract=955820 or http://dx.doi.org/10.2139/ssrn.955820

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jianqing Fan

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States
609-258-7924 (Phone)
609-258-8551 (Fax)

HOME PAGE: http://orfe.princeton.edu/~jqfan/

Heng Peng

Hong Kong Baptist University (HKBU) ( email )

Kowloon
Hong Kong

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