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Simulation-Based Exact Tests in Jump-Diffusion Models in the Presence of Unidentified Nuisance Parameters: an Application to Commodity Spot Prices

Author

Listed:
  • Khalaf, L.
  • Saphores, J.
  • Bilodeau, J.F.

Abstract

We use the Monte-Carlo (MC) test technique to find valid p-values when testing for discontinuities in jump-diffusion models. While the distribution of the LR statistic for this test is typically non-standard, we show that the MC p-value is finite sample exact if no other (identified) nuisance parameter is present. Otherwise, we derive nuisance-parameter free bounds and obtain exact bounds p-values. We illustrate our approach on four classes of jump-diffusion models we use to model spot prices of copper, nickel, golds, and crude oil. We find significant jumps in all weekly time series and in a few monthly time series.

Suggested Citation

  • Khalaf, L. & Saphores, J. & Bilodeau, J.F., 2000. "Simulation-Based Exact Tests in Jump-Diffusion Models in the Presence of Unidentified Nuisance Parameters: an Application to Commodity Spot Prices," Papers 00-04, Laval - Recherche en Energie.
    • Handle: RePEc:fth:lavaen:00-04
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    Keywords

    TESTS ; ECONOMIC MODELS;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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