Consistent estimation of drift parameter in diffusion model with misspecified volatility function

Minsoo Jeong

Economics Letters, 2022, vol. 211, issue C

Abstract: The drift parameter of a diffusion model can be consistently estimated by the MLE based on the Euler approximation even when the volatility function is misspecified. Contrastingly, all other commonly used estimators such as the exact MLE, the MLE by Aït-Sahalia, the MLE by Kessler and the MLE based on the Milstein approximation generally yield inconsistent drift estimates if the volatility function is misspecified.

Keywords: Diffusion model; Drift and diffusion functions; Misspecification; Consistency; Maximum likelihood estimation (search for similar items in EconPapers)
JEL-codes: C14 C22 C51 G10 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:211:y:2022:i:c:s0165176521004742

DOI: 10.1016/j.econlet.2021.110237

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