Conditional estimation of diffusion processes

There are a number of circumstances in finance in which it is useful to estimate diffusion processes conditional on some event. In this paper, we develop the theoretical and numerical tools necessary to perform conditional estimation of diffusion processes within a generalized method of moments fram...

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Bibliographic Details
Published in:Journal of financial economics 2004-10, Vol.74 (1), p.31-66
Main Authors: Li, Minqiang, Pearson, Neil D., Poteshman, Allen M.
Format: Article
Language:English
Subjects:
Diffusion index
Diffusion process
Economic models
Estimating techniques
Estimation
Finance
Financial economics
Generalized method of moments
Interest rates
Linear models
Nonlinearity
Studies
Time series
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Summary:There are a number of circumstances in finance in which it is useful to estimate diffusion processes conditional on some event. In this paper, we develop the theoretical and numerical tools necessary to perform conditional estimation of diffusion processes within a generalized method of moments framework. We illustrate our method by estimating a univariate diffusion process for a standard time-series of interest rate data conditioned to remain between lower and upper boundaries. A test statistic fails to reject by a wide margin the linearity of the conditionally estimated drift coefficient.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2004.03.001