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The Pearson diffusions: A class of statistically tractable diffusion processes

  • Michael Sørensen
  • Julie Lyng Forman

    ()

    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

The Pearson diffusions is a flexible class of diffusions defined by having linear drift and quadratic squared diffusion coefficient. It is demonstrated that for this class explicit statistical inference is feasible. Explicit optimal martingale estimating func- tions are found, and the corresponding estimators are shown to be consistent and asymptotically normal. The discussion covers GMM, quasi-likelihood, and non- linear weighted least squares estimation too, and it is discussed how explicit likeli- hood or approximate likelihood inference is possible for the Pearson diffusions. A complete model classification is presented for the ergodic Pearson diffusions. The class of stationary distributions equals the full Pearson system of distributions. Well-known instances are the Ornstein-Uhlenbeck processes and the square root (CIR) processes. Also diffusions with heavy-tailed and skew marginals are included. Special attention is given to a skew t-type distribution. Explicit formulae for the conditional moments and the polynomial eigenfunctions are derived. The analyti- cal tractability is inherited by transformed Pearson diffusions, integrated Pearson diffusions, sums of Pearson diffusions, and stochastic volatility models with Pearson volatility process. For the non-Markov models explicit optimal prediction based estimating functions are found and shown to yield consistent and asymptotically normal estimators.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2007-28.

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Length: 32
Date of creation: 27 Sep 2007
Date of revision:
Handle: RePEc:aah:create:2007-28
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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