Nonparametric Estimation and Misspecification Testing of Diffusion Models

Dennis Kristensen

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: A nonparametric kernel estimator of the drift (diffusion) term in a diffusion model are developed given a preliminary parametric estimator of the diffusion (drift) term. Under regularity conditions, rates of convergence and asymptotic normality of the nonparametric estimators are established. We develop mis- specification tests of parametric diffusion models based on the nonparametric estimators, and derive the asymptotic properties of the tests. We also propose a Markov Bootstrap method for the test statistics to improve on the finite-sample approximations. The finite sample properties of the estimators are examined in a simulation study.

Keywords: Diffusion; fixed-time distance asymptotics; kernel estimation; misspecification test; nonparametric (search for similar items in EconPapers)
JEL-codes: C14 C22 (search for similar items in EconPapers)
Pages: 31
Date: 2007-05-11
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Citations: View citations in EconPapers (4)

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