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Maximum penalized quasi-likelihood estimation of the diffusion function

Author

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  • Jeff Hamrick
  • Yifei Huang
  • Constantinos Kardaras
  • Murad Taqqu

Abstract

We develop a maximum penalized quasi-likelihood estimator for estimating in a nonparametric way the diffusion function of a diffusion process, as an alternative to more traditional kernel-based estimators. After developing a numerical scheme for computing the maximizer of the penalized maximum quasi-likelihood function, we study the asymptotic properties of our estimator by way of simulation. Under the assumption that overnight London Interbank Offered Rates (LIBOR); the USD/EUR, USD/GBP, JPY/USD, and EUR/USD nominal exchange rates; and 1-month, 3-month, and 30-year Treasury bond yields are generated by diffusion processes, we use our numerical scheme to estimate the diffusion function.

Suggested Citation

  • Jeff Hamrick & Yifei Huang & Constantinos Kardaras & Murad Taqqu, 2010. "Maximum penalized quasi-likelihood estimation of the diffusion function," Papers 1008.2421, arXiv.org, revised Jan 2011.
  • Handle: RePEc:arx:papers:1008.2421
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    File URL: http://arxiv.org/pdf/1008.2421
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    Cited by:

    1. 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.

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