Testing of the mean reversion parameter in continuous time models
In this paper we use the approximate bias expressions developed in Yu (2012) and Bao et al. (2013) to improve the testing of the ordinary least squares or quasi-maximum likelihood estimator of the mean reversion parameter in continuous time models. We follow the approach given in Iglesias and Phillips (2005) and Chambers (2013), where if we bias correct the estimated mean reversion parameter, we can improve on the small sample properties of the testing procedure. Simulation results confirm the usefulness of this approach using a t-statistic in this setting in the near unit root situation when the mean reversion parameter is approaching its lower bound. Therefore we always recommend bias correcting when applying a t-statistic in practice in this context.
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- Chambers, Marcus J., 2013.
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- Jun Yu, 2009. "Bias in the Estimation of the Mean Reversion Parameter in Continuous Time Models," Working Papers 16-2009, Singapore Management University, School of Economics.
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