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Semiparametric diffusion estimation and application to a stock market index

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Author Info

  • Wolfgang Hardle
  • Torsten Kleinow
  • Alexander Korostelev
  • Camille Logeay
  • Eckhard Platen

Abstract

The analysis of diffusion processes in financial models is crucially dependent on the form of the drift and diffusion coefficient functions. A new model for a stock market index process is proposed in which the index is decomposed into an average growth process and an ergodic diffusion. The ergodic diffusion part of the model is not directly observable. A methodology is developed for estimating and testing the coefficient functions of this unobserved diffusion process. The estimation is based on the observations of the index process and uses semiparametric and non-parametric techniques. The testing is performed via the wild bootstrap resampling technique. The method is illustrated on S&P 500 index data.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 8 (2008)
Issue (Month): 1 ()
Pages: 81-92

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Handle: RePEc:taf:quantf:v:8:y:2008:i:1:p:81-92

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Related research

Keywords: Diffusion; Identification; Continuous-time financial models; Semiparametric methods; Kernel smoothing; Bootstrap;

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Cited by:
  1. Härdle, Wolfgang & Horowitz, Joel L. & Kreiss, Jens-Peter, 2001. "Bootstrap methods for time series," SFB 373 Discussion Papers 2001,59, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.

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