Specification Analysis of Continuous Time Models in Finance
The paper describes the use of the Gallant-Tauchen efficient method of moments (EMM) technique for diagnostic checking of stochastic differential equations (SDEs) estimated from financial market data. The EMM technique is a simulation-based method that uses the score function of an auxiliary model as the criterion to define a generalized method of moments (GMM) objective function. The technique can handle multivariate SDEs where the state vector is not completely observed. The optimized GMM objective function is distributed as chi-square and may be used to test model adequacy. Elements of the score function correspond to specific parameters and large values reflect features of data that a rejected SDE specification does not describe well. The diagnostics are illustrated by estimating a three-factor model to weekly, 1962-1995, term structure data comprised of short (3 month), medium (12 month), and long (10 year) Treasury rates. The Yield-Factor Model is sharply rejected, although an extension that permits the local variance function to be a convex function of the interest rates comes much closer to describing the data.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||1995|
|Date of revision:|
|Publication status:||Published in MODELLING STOCK MARKET VOLATILITY: BRIDGING THE GAP TO CONTINUOUS TIME, Peter E. Rossi (ed.), Academic Press, 1996, pages 357-383|
|Contact details of provider:|| Postal: |
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/
When requesting a correction, please mention this item's handle: RePEc:duk:dukeec:95-49. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Department of Economics Webmaster)
If references are entirely missing, you can add them using this form.