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Testing the Parametric Specification of the Diffusion Function in a Diffusion Process

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Author Info
Fuchun Li
Abstract

A new consistent test is proposed for the parametric specification of the diffusion function in a diffusion process without any restrictions on the functional form of the drift function. The data are assumed to be sampled discretely in a time interval that can be fixed or lengthened to infinity. The test statistic is shown to follow an asymptotic normal distribution under the null hypothesis that the parametric diffusion function is correctly specified. Monte Carlo simulations are conducted to examine the finite-sample performance of the test, revealing that the test has good size and power.

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File URL: http://www.bankofcanada.ca/en/res/wp/2005/wp05-35.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 05-35.

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Length: 50 pages
Date of creation: 2005
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Handle: RePEc:bca:bocawp:05-35

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Related research
Keywords: Econometric and statistical methods; Interest rates;

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods

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    Other versions:
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    Other versions:
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