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Estimation of Diffusions using Wavelet scaling methods

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  • Esben Hoeg
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    Abstract

    In continuous time, diffusion processes have been used for modelling financial dynamics for a long time. For example the Ornstein-Uhlenbeck process (the simplest mean-reverting process)has been used to model non-speculative price processes. The Cox-Ingersoll-Ross process is widely used to model interest rate dynamics. We discuss parameter estimation of these processes using a new method, namely a Wavelet filter method. This approach is useful as it turns out that the resulting covariance function is decorrelated. We use Monte Carlo simulation to report the distribution of estimates.

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 255.

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    Date of creation: 01 Apr 2001
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    Handle: RePEc:sce:scecf1:255

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    Keywords: Ornstein-Uhlenbeck process; CIR model; Wavelet transform;

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    1. repec:cup:etheor:v:13:y:1997:i:3:p:430-61 is not listed on IDEAS
    2. E. Roy Weintraub, 1992. "Introduction," History of Political Economy, Duke University Press, vol. 24(5), pages 3-12, Supplemen.
    3. Overbeck, Ludger & Rydén, Tobias, 1997. "Estimation in the Cox-Ingersoll-Ross Model," Econometric Theory, Cambridge University Press, vol. 13(03), pages 430-461, June.
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