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

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2015-17

Classification and Topics

• Classification: Wirtschaft ; Hypothesis Testing: General ; Semiparametric and Nonparametric Methods: General ; General Aggregative Models: Forecasting and Simulation: Models and Applications ; Interest Rates: Determination, Term Structure, and Effects ; Asset Pricing; Trading Volume; Bond Interest Rates ; Financial Institutions and Services: General
• Subject: Asset pricing ; Interest rates ; Econometric and statistical methods

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Li, Fuchun
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2015

Further information

• DOI: doi:10.34989/swp-2015-17
• Handle: http://hdl.handle.net/10419/123758
• Last update: 10.03.2025, 11:43 AM CET