IDEAS home Printed from
   My bibliography  Save this paper

Accurate and robust indirect inference for diffusion models


  • Veronika Czellar
  • Elvezio Ronchetti


Indirect inference (Smith, 1993; Gouriéroux, Monfort and Renault, 1993) is a simulation-based estimation method dealing with econometric models whose likelihood function is intractable. Typical examples are diffusion models described by stochastic differential equations. A potential problem that arises when estimating a diffusion model is the possible model misspecifcation which can lead to biased estimators and misleading test results. To correct the bias due to model misspecifcation, Genton and Ronchetti (2003) proposed robust indirect inference. The standard asymptotic approximation to the finite sample distribution of the robust indirect estimators and tests, however, can be very poor and can lead to misleading inference. To improve the finite sample accuracy, we propose in this paper an optimal choice of the auxiliary discretized model and a new test based on asymptotically equivalent M-estimators of the robust indirect estimators. We apply the robust indirect saddlepoint tests using an optimal choice of discretization to various contaminated diffusion models and we illustrate the gain in finite sample accuracy when using the new technique.

Suggested Citation

  • Veronika Czellar & Elvezio Ronchetti, 2008. "Accurate and robust indirect inference for diffusion models," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 2008.01, Institut d'Economie et Econométrie, Université de Genève.
  • Handle: RePEc:gen:geneem:2008.01

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
    2. Czellar, Veronika & Karolyi, G. Andrew & Ronchetti, Elvezio, 2007. "Indirect robust estimation of the short-term interest rate process," Journal of Empirical Finance, Elsevier, vol. 14(4), pages 546-563, September.
    3. Yacine Aït-Sahalia, 1999. "Transition Densities for Interest Rate and Other Nonlinear Diffusions," Journal of Finance, American Finance Association, vol. 54(4), pages 1361-1395, August.
    4. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October.
    5. Ortelli, Claudio & Trojani, Fabio, 2005. "Robust efficient method of moments," Journal of Econometrics, Elsevier, vol. 128(1), pages 69-97, September.
    6. Broze, Laurence & Scaillet, Olivier & Zako an, Jean-Michel, 1998. "Quasi-Indirect Inference For Diffusion Processes," Econometric Theory, Cambridge University Press, vol. 14(02), pages 161-186, April.
    7. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
    8. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages 63-84, Suppl. De.
    9. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages 85-118, Suppl. De.
    10. Knut Heggland & Arnoldo Frigessi, 2004. "Estimating functions in indirect inference," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 66(2), pages 447-462.
    11. Genton, Marc G. & de Luna, Xavier, 2000. "Robust simulation-based estimation," Statistics & Probability Letters, Elsevier, vol. 48(3), pages 253-259, July.
    12. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    Full references (including those not matched with items on IDEAS)

    More about this item


    indirect inference; M-estimators; influence function; robust statistics; saddlepoint approximations;

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gen:geneem:2008.01. 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: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.