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Testing the Parametric Specification of the Diffusion Function in a Diffusion Process

  • Fuchun Li

A new consistent test is proposed for the parametric specification of the diffusion function in a diffusion process without any restrictions on the functional form of the drift function. The data are assumed to be sampled discretely in a time interval that can be fixed or lengthened to infinity. The test statistic is shown to follow an asymptotic normal distribution under the null hypothesis that the parametric diffusion function is correctly specified. Monte Carlo simulations are conducted to examine the finite-sample performance of the test, revealing that the test has good size and power.

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Paper provided by Bank of Canada in its series Working Papers with number 05-35.

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Length: 50 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bca:bocawp:05-35
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