Arbeitspapier

Testing the diffusion coefficient

In mathematical finance diffusion models are widely used and a variety of different parametric models for the drift and diffusion coefficient coexist in the literature. Since derivative prices depend on the particular parametric model of the diffusion coefficient function of the underlying, a misspecification of this function leads to misspecified option prices. We develop two tests about a parametric form of the diffusion coefficient. The finite sample properties of the tests are investigated in a simulation study and the tests are applied to the 7 -day Eurodollar rate, the German stock market index DAX and five German stocks. For all observed processes, we find in the empirical analysis that our tests reject all tested parametric models. We conclude that affine diffusion processes might not be appropriate to model the evolution of financial time series and that a successful model for a financial market should incorporate the history of the observed processes of additional sources of randomness like stochastic volatility models.

Sprache
Englisch

Erschienen in
Series: SFB 373 Discussion Paper ; No. 2002,38

Klassifikation
Wirtschaft
Hypothesis Testing: General
Semiparametric and Nonparametric Methods: General
Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
Model Evaluation, Validation, and Selection
Thema
Diffusion
Continuous-time financial models
Nonparametric methods
Kernel smoothing
Goodness of fit test
spot rate models
interest rate
stock market index
Empirical Likelihood

Ereignis
Geistige Schöpfung
(wer)
Kleinow, Torsten
Ereignis
Veröffentlichung
(wer)
Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes
(wo)
Berlin
(wann)
2002

Handle
URN
urn:nbn:de:kobv:11-10048964
Letzte Aktualisierung
05.10.2025, 18:01 MESZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Kleinow, Torsten
  • Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Entstanden

  • 2002

Ähnliche Objekte (12)