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An asymptotic analysis of likelihood-based diffusion model selection using high frequency data

Author

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  • Choi, Hwan-sik
  • Jeong, Minsoo
  • Park, Joon Y.

Abstract

We provide a new asymptotic analysis of model selection procedure that compares likelihoods of two candidate diffusion models. Our asymptotic analysis relies on two dimensional asymptotic expansions with shrinking sampling interval Δ and increasing sampling span T, and clarifies the different roles of drift and diffusion functions in the selection of diffusion models. In particular, we show that the model with superior diffusion function specification is always preferred to the competing model regardless of their drift specifications if Δ is sufficiently small relative to T. The specifications of drift functions matter only when the models have an identical diffusion specification.

Suggested Citation

  • Choi, Hwan-sik & Jeong, Minsoo & Park, Joon Y., 2014. "An asymptotic analysis of likelihood-based diffusion model selection using high frequency data," Journal of Econometrics, Elsevier, vol. 178(P3), pages 539-557.
    • Handle: RePEc:eee:econom:v:178:y:2014:i:p3:p:539-557
    DOI: 10.1016/j.jeconom.2013.08.036
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    Cited by:

    1. Choi, Hwan-sik, 2016. "Information theory for maximum likelihood estimation of diffusion models," Journal of Econometrics, Elsevier, vol. 191(1), pages 110-128.
    2. Liu, Tuo & Lee, Lung-fei, 2019. "A likelihood ratio test for spatial model selection," Journal of Econometrics, Elsevier, vol. 213(2), pages 434-458.
    3. Jeong, Minsoo, 2022. "Consistent estimation of drift parameter in diffusion model with misspecified volatility function," Economics Letters, Elsevier, vol. 211(C).

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    More about this item

    Keywords

    Diffusion; Model selection; High frequency observation; Likelihood ratio; Information criterion; Spot interest rate;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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