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Estimating the diffusion coefficient function for a diversified world stock index

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  • Ignatieva, Katja
  • Platen, Eckhard

Abstract

This paper deals with the estimation of continuous-time diffusion processes which model the dynamics of a well diversified world stock index (WSI). We use the nonparametric kernel-based estimation to empirically identify a square root type diffusion coefficient function in the dynamics of the discounted WSI. A square root process turns out to be an excellent building block for a parsimonious model for the WSI. Its dynamics allow capturing various empirical stylized facts and long term properties of the index, as well as, the explicit computation of various financial quantities.

Suggested Citation

  • Ignatieva, Katja & Platen, Eckhard, 2012. "Estimating the diffusion coefficient function for a diversified world stock index," Computational Statistics & Data Analysis, Elsevier, vol. 56(6), pages 1333-1349.
    • Handle: RePEc:eee:csdana:v:56:y:2012:i:6:p:1333-1349
    DOI: 10.1016/j.csda.2011.10.004
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    Cited by:

    1. Jan Baldeaux & Fung & Katja Ignatieva & Eckhard Platen, 2015. "A Hybrid Model for Pricing and Hedging of Long-dated Bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(4), pages 366-398, September.
    2. Baldeaux Jan & Ignatieva Katja & Platen Eckhard, 2014. "A tractable model for indices approximating the growth optimal portfolio," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 1-21, February.
    3. Biagini, Francesca & Groll, Andreas & Widenmann, Jan, 2013. "Intensity-based premium evaluation for unemployment insurance products," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 302-316.
    4. Shota Gugushvili & Frank van der Meulen & Moritz Schauer & Peter Spreij, 2018. "Nonparametric Bayesian volatility learning under microstructure noise," Papers 1805.05606, arXiv.org, revised Mar 2024.

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