Semi-Nonparametric Estimation and Misspecification Testing of Diffusion Models

Dennis Kristensen

No 10-10, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We propose novel misspecification tests of semiparametric and fully parametric univariate diffusion models based on the estimators developed in Kristensen (Journal of Econometrics, 2010). We first demonstrate that given a preliminary estimator of either the drift or the diffusion term in a diffusion model, nonparametric kernel estimators of the remaining term can be obtained. We then propose misspecification tests of semparametric and fully parametric diffusion models that compare estimators of the transition density under the relevant null and alternative. The asymptotic distribution of the estimators and tests under the null are derived, and the power properties are analyzed by considering contiguous alternatives. Test directly comparing the drift and diffusion estimators under the relevant null and alternative are also analyzed. Markov Bootstrap versions of the test statistics are proposed to improve on the finite-sample approximations. The finite sample properties of the estimators are examined in a simulation study.

Keywords: diffusion process; kernel estimation; nonparametric; specification testing; semiparametric; transition density (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C22 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2010-03
New Economics Papers: this item is included in nep-ecm
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http://www.econ.ku.dk/english/research/publications/wp/dp_2010/1010.pdf/ (application/pdf)

Related works:
Journal Article: Semi-nonparametric estimation and misspecification testing of diffusion models (2011)
Working Paper: Semi-Nonparametric Estimation and Misspecification Testing of Diffusion Models (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:1010

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