EconPapers    
Economics at your fingertips  
 

Testing for the Diffusion Matrix in a Continuous-Time Markov Process Model with Applications to the Term Structure of Interest Rates

Fuchun Li

Staff Working Papers from Bank of Canada

Abstract: The author proposes a test for the parametric specification of each component in the diffusion matrix of a d-dimensional diffusion process. Overall, d (d-1)/2 test statistics are constructed for the off-diagonal components, while d test statistics are constructed for the main diagonal components. Using theories of degenerate U-statistics, each of these test statistics is shown to follow an asymptotic standard normal distribution under null hypothesis, while diverging to infinity if the component is misspecified over a significant range. Our tests strongly reject the specification of diffusion functions in a variety of popular univariate interest rate models for daily 7-day eurodollar spot rates, and the specification of the diffusion matrix in some popular multivariate affine term-structure models for monthly U.S. Treasury yields.

Keywords: Asset Pricing; Econometric and statistical methods; Interest rates (search for similar items in EconPapers)
JEL-codes: C12 C14 E17 E43 G12 G20 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2015
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2015/06/wp2015-17.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:15-17

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2023-01-25
Handle: RePEc:bca:bocawp:15-17