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Estimation of Diffusions using Wavelet scaling methods

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  • Esben Hoeg

Abstract

In continuous time, diffusion processes have been used for modelling financial dynamics for a long time. For example the Ornstein-Uhlenbeck process (the simplest mean-reverting process)has been used to model non-speculative price processes. The Cox-Ingersoll-Ross process is widely used to model interest rate dynamics. We discuss parameter estimation of these processes using a new method, namely a Wavelet filter method. This approach is useful as it turns out that the resulting covariance function is decorrelated. We use Monte Carlo simulation to report the distribution of estimates.

Suggested Citation

  • Esben Hoeg, 2001. "Estimation of Diffusions using Wavelet scaling methods," Computing in Economics and Finance 2001 255, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:255
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    1. repec:cup:etheor:v:13:y:1997:i:3:p:430-61 is not listed on IDEAS
    2. Overbeck, Ludger & Rydén, Tobias, 1997. "Estimation in the Cox-Ingersoll-Ross Model," Econometric Theory, Cambridge University Press, vol. 13(03), pages 430-461, June.
    3. E. Roy Weintraub, 1992. "Introduction," History of Political Economy, Duke University Press, vol. 24(5), pages 3-12, Supplemen.
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    Keywords

    Ornstein-Uhlenbeck process; CIR model; Wavelet transform;

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • G0 - Financial Economics - - General

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