The delta expansion for the transition density of diffusion models

Yoon Dong Lee, Seongjoo Song and Eun-Kyung Lee

Journal of Econometrics, 2014, vol. 178, issue P3, 694-705

Abstract: This paper is on the issue of finding a closed-form likelihood approximation of diffusion processes and rearranging the Hermite expansion in the order of the power of the observational time interval. We propose an algorithm that calculates the coefficients of the rearranged expansion that Aït-Sahalia (2002) suggested. That is, a general expression of the coefficients is provided explicitly, which as far as we know has not been given in the existing literature. We also introduce a reduced form of the rearranged expansion and call it as the delta expansion in the paper. Moreover, we are able to obtain an explicit expansion of the moments in the order of the power of the observational time interval.

Keywords: Diffusion model; Transition density; Edgeworth expansion; Likelihood estimation; Hermite expansion (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:178:y:2014:i:p3:p:694-705

DOI: 10.1016/j.jeconom.2013.10.008

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