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Reweighted Functional Estimation Of Diffusion Models

  • Xu, Ke-Li
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The local linear method is popular in estimating nonparametric continuous-time diffusion models, but it may produce negative results for the diffusion (or volatility) functions and thus lead to insensible inference. We demonstrate this using U.S. interest rate data. We propose a new functional estimation method of the diffusion coefficient based on reweighting the conventional Nadaraya–Watson estimator. It preserves the appealing bias properties of the local linear estimator and is guaranteed to be nonnegative in finite samples. A limit theory is developed under mild requirements (recurrence) of the data generating mechanism without assuming stationarity or ergodicity.

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Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 26 (2010)
Issue (Month): 02 (April)
Pages: 541-563

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Handle: RePEc:cup:etheor:v:26:y:2010:i:02:p:541-563_10
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
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