Consistent Pretesting for Jumps
If the intensity parameter in a jump diffusion model is identically zero, then parameters characterizing the jump size density cannot be identified. In general, this lack of identification precludes consistent estimation of identified parameters. Hence, it should be standard practice to consistently pretest for jumps, prior to estimating jump diffusions. Many currently available tests have power against the presence of jumps over a nite time span (typically a day or a week); and, as already noted by various authors, jumps may not be observed over nite time spans, even if the intensity parameter is strictly positive. Such tests cannot be consistent against non-zero intensity. Moreover, sequential application of nite time span tests usually leads to sequential testing bias, which in turn leads to jump discovery with probability one, in the limit, even if the true intensity is identically zero. This paper introduces tests for jump intensity, based on both in- ll and long-span asymptotics, which solve both the test consistency and the sequential testing bias problems discussed above, in turn facilitating consistent estimation of jump diffusion models. A self excitement test is also introduced, which is designed to have power against path dependent intensity, thus providing a direct test for the Hawkes diffusion model of Ait-Sahalia, Cacho-Diaz and Laeven (2013). In a series of Monte Carlo experiments, the proposed tests are evaluated, and are found to perform adequately in nite samples.
|Date of creation:||09 Jun 2014|
|Contact details of provider:|| Postal: New Jersey Hall - 75 Hamilton Street, New Brunswick, NJ 08901-1248|
Phone: (732) 932-7363
Fax: (732) 932-7416
Web page: http://economics.rutgers.edu/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:rut:rutres:201408. 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: ()
If references are entirely missing, you can add them using this form.