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Nonparametric estimation of diffusion process: a closer look

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  • Orazio Di Miscia

    (Banca Intesa)

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    Abstract

    A Monte Carlo simulation is performed to investigate the finite sample properties of a nonparametric estimator, based on discretely sampled observations of continuous-time Ito diffusion process. Chapman and Pearson (2000) studies finite-sample properties of the nonparametric estimator of Aýt-Sahalia (1996) and Stanton (1997) and they find that nonlinearity of the short rate drift is not a robust stylized fact but it’s an artifacts of the estimation procedure. This paper examine the finite sample properties of a different nonparametric estimator within the Stanton (1997)’s framework.

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    File URL: http://128.118.178.162/eps/fin/papers/0504/0504016.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 0504016.

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    Length: 17 pages
    Date of creation: 19 Apr 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:0504016

    Note: Type of Document - pdf; pages: 17
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    Web page: http://128.118.178.162

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    Keywords: ewp-mac/050417;

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    1. Andrew W. Lo & Jiang Wang, 1994. "Implementing Option Pricing Models When Asset Returns Are Predictable," NBER Working Papers 4720, National Bureau of Economic Research, Inc.
    2. Ait-Sahalia, Yacine, 1996. "Nonparametric Pricing of Interest Rate Derivative Securities," Econometrica, Econometric Society, vol. 64(3), pages 527-60, May.
    3. Phillips, P. C. B., 1973. "The problem of identification in finite parameter continuous time models," Journal of Econometrics, Elsevier, vol. 1(4), pages 351-362, December.
    4. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    5. David A. Chapman & Neil D. Pearson, 1998. "Is the Short Rate Drift Actually Nonlinear?," Finance 9808005, EconWPA.
    6. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-52, July.
    7. Lo, Andrew W., 1988. "Maximum Likelihood Estimation of Generalized Itô Processes with Discretely Sampled Data," Econometric Theory, Cambridge University Press, vol. 4(02), pages 231-247, August.
    8. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    9. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    10. Courtadon, Georges, 1982. "The Pricing of Options on Default-Free Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(01), pages 75-100, March.
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