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Telling from Discrete Data Whether the Underlying Continuous-Time Model Is a Diffusion

Yacine Ait-Sahalia

Journal of Finance, 2002, vol. 57, issue 5, 2075-2112

Abstract: Can discretely sampled financial data help us decide which continuous-time models are sensible? Diffusion processes are characterized by the continuity of their sample paths. This cannot be verified from the discrete sample path: Even if the underlying path were continuous, data sampled at discrete times will always appear as a succession of jumps. Instead, I rely on the transition density to determine whether the discontinuities observed are the result of the discreteness of sampling, or rather evidence of genuine jump dynamics for the underlying continuous-time process. I then focus on the implications of this approach for option pricing models. Copyright The American Finance Association 2002.

Date: 2002
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