Telling from Discrete Data Whether the Underlying Continuous-Time Model Is a Diffusion
Can discretely sampled financial data help us decide which continuous-time models are sensible? Diffusion processes are characterized by the continuity of their sample paths. This cannot be verified from the discrete sample path: Even if the underlying path were continuous, data sampled at discrete times will always appear as a succession of jumps. Instead, I rely on the transition density to determine whether the discontinuities observed are the result of the discreteness of sampling, or rather evidence of genuine jump dynamics for the underlying continuous-time process. I then focus on the implications of this approach for option pricing models. Copyright The American Finance Association 2002.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 57 (2002)
Issue (Month): 5 (October)
|Contact details of provider:|| Web page: http://www.afajof.org/|
More information through EDIRC
|Order Information:||Web: http://www.afajof.org/membership/join.asp|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Banz, Rolf W & Miller, Merton H, 1978. "Prices for State-contingent Claims: Some Estimates and Applications," The Journal of Business, University of Chicago Press, vol. 51(4), pages 653-72, October.
- Darrell Duffie & Jun Pan & Kenneth Singleton, 2000.
"Transform Analysis and Asset Pricing for Affine Jump-Diffusions,"
Econometric Society, vol. 68(6), pages 1343-1376, November.
- Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
- Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
- Merton, Robert C., 1976.
"Option pricing when underlying stock returns are discontinuous,"
Journal of Financial Economics,
Elsevier, vol. 3(1-2), pages 125-144.
- Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Florens, Jean-Pierre & Renault, Eric & Touzi, Nizar, 1998. "Testing For Embeddability By Stationary Reversible Continuous-Time Markov Processes," Econometric Theory, Cambridge University Press, vol. 14(06), pages 744-769, December.
- Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
- Jarrow, Robert & Rudd, Andrew, 1982. "Approximate option valuation for arbitrary stochastic processes," Journal of Financial Economics, Elsevier, vol. 10(3), pages 347-369, November.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
- Yacine Ait-Sahalia, 1995.
"Nonparametric Pricing of Interest Rate Derivative Securities,"
NBER Working Papers
5345, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine, 1996. "Nonparametric Pricing of Interest Rate Derivative Securities," Econometrica, Econometric Society, vol. 64(3), pages 527-60, May.
- 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.
- Yacine Ait-Sahalia, 1995.
"Testing Continuous-Time Models of the Spot Interest Rate,"
NBER Working Papers
5346, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
- Ait-Sahalia, Yacine & Wang, Yubo & Yared, Francis, 2001. "Do option markets correctly price the probabilities of movement of the underlying asset?," Journal of Econometrics, Elsevier, vol. 102(1), pages 67-110, May.
- Yacine Aït-Sahalia, 1999. "Transition Densities for Interest Rate and Other Nonlinear Diffusions," Journal of Finance, American Finance Association, vol. 54(4), pages 1361-1395, 08.
When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2075-2112. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.