Specification testing in discretized diffusion models: Theory and practice
Date
2008
Authors
Gao, J.
Casas, I.
Editors
Advisors
Journal Title
Journal ISSN
Volume Title
Type:
Journal article
Citation
Journal of Econometrics, 2008; 147(1):131-140
Statement of Responsibility
Jiti Gao, Isabel Casas
Conference Name
Abstract
We propose two new tests for the specification of both the drift and the diffusion functions in a discretized version of a semiparametric continuous-time financial econometric model. Theoretically, we establish some asymptotic consistency results for the proposed tests. Practically, a simple selection procedure for the bandwidth parameter involved in each of the proposed tests is established based on the assessment of the power function of the test under study. To the best of our knowledge, this is the first approach of this kind in specification of continuous-time financial econometrics. The proposed theory is supported by good small and medium-sample studies. © 2008 Elsevier B.V. All rights reserved.