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Estimation in Two Classes of Semiparametric Diffusion Models

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  • Dennis Kristensen

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Abstract

In this paper we propose an estimation method for two classes of semiparametric scalar diffusion models driven by a Brownian motion: In the first class, only the diffusion term is parameterised while the drift is unspecified; in the second, the drift term is specified while the diffusion term is of unknown form. The estimation method is based on the assumption of stationarity of the observed process. This allows us to express the unspecified term as a functional of the parametric part and the stationary density. A MLE-like estimator for the parametric part and a kernel estimator of the nonparametric part are defined for a discrete sample with a fixed time distance between the observations. We show that the parametric part of the estimator is n-consistent, while the nonparametric part has a slower convergence rate. Also, the asymptotic distribution of the estimator is derived. We give a brief discussion of the issue of semiparametric efficiency, and present a small simulation study of the finite-sample performance of our estimator.

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp500.

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Date of creation: Jun 2004
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Handle: RePEc:fmg:fmgdps:dp500

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Cited by:
  1. Dennis Kristensen, 2009. "Pseudo-Maximum Likelihood Estimation in Two Classes of Semiparametric Diffusion Models," CREATES Research Papers 2009-41, School of Economics and Management, University of Aarhus.
  2. Kristensen, Dennis & Shin, Yongseok, 2012. "Estimation of dynamic models with nonparametric simulated maximum likelihood," Journal of Econometrics, Elsevier, vol. 167(1), pages 76-94.
  3. Kristensen, Dennis, 2008. "Estimation of partial differential equations with applications in finance," Journal of Econometrics, Elsevier, vol. 144(2), pages 392-408, June.
  4. Xu, Ke-Li, 2009. "Empirical likelihood-based inference for nonparametric recurrent diffusions," Journal of Econometrics, Elsevier, vol. 153(1), pages 65-82, November.
  5. Gao, Jiti & Casas, Isabel, 2008. "Specification testing in discretized diffusion models: Theory and practice," Journal of Econometrics, Elsevier, vol. 147(1), pages 131-140, November.
  6. Fuchun Li, 2005. "Testing the Parametric Specification of the Diffusion Function in a Diffusion Process," Working Papers 05-35, Bank of Canada.
  7. Yu, Jialin, 2007. "Closed-form likelihood approximation and estimation of jump-diffusions with an application to the realignment risk of the Chinese Yuan," Journal of Econometrics, Elsevier, vol. 141(2), pages 1245-1280, December.

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