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Diffusion Copulas: Identification and Estimation

Author

Listed:
  • Ruijun Bu

    (Department of Economics, Management School, University of Liverpool)

  • Kaddour Hadri

    (Queen?s University Management School, Queen?s University Belfast)

  • Dennis Kristensen

    (University College London, CeMMaP, and Institute for Fiscal Studies)

Abstract
We propose a new semiparametric approach for modelling nonlinear univariate diffusions, where the observed processes are nonparametric transformations of underlying parametric diffusions (UPDs). This modelling strategy yields a general class of semiparametric Markov diffusion models with parametric dynamic copulas and nonparametric marginal distributions. We provide primitive conditions for the identification of the UPD parameters together with the unknown transformations from discrete samples. Semiparametric likelihood-based estimators of the UPD parameters are developed and we show that under regularity conditions both the parametric and nonparametric components converge with parametric rate towards Normal distributions. Kernel-based drift and diffusion estimators are also proposed and shown to be normally distributed in large samples. A simulation study investigates the ?finite sample performance of our estimators in the context of modelling US short-term interest rates.

Suggested Citation

  • Ruijun Bu & Kaddour Hadri & Dennis Kristensen, 2018. "Diffusion Copulas: Identification and Estimation," CREATES Research Papers 2018-20, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2018-20
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Continuous-time model; diffusion process; copula; transformation model; identifi?cation; nonparametric; semiparametric; maximum likelihood; sieve; kernel smoothing;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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