Semiparametric estimation of locally stationary diffusion models

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper proposes a class of locally stationary diffusion processes. The model has a time varying but locally linear drift and a volatility coefficient that is allowed to vary over time and space. We propose estimators of all the unknown quantities based on long span data. Our estimation method makes use of the local stationarity. We establish asymptotic theory for the proposed estimators as the time span increases. We apply this method to the real financial data to illustrate the validity of our model. Finally, we present a simulation study to provide the finitesample performance of the proposed estimators.

Keywords: diffusion processes; local stationarity; term structure dynamics; density matching; option pricing (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2010-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://eprints.lse.ac.uk/58186/ Open access version. (application/pdf)

Related works:
Working Paper: Semiparametric Estimation of Locally Stationary Diffusion Models (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:58186

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