Bootstrap specification tests for diffusion processes

Valentina Corradi, Norman R. Swanson

Research output: Contribution to journalArticlepeer-review

29 Scopus citations

Abstract

This paper discusses specification tests for diffusion processes. In the one-dimensional case, our proposed test is closest to the nonparametric test of Aït-Sahalia (Rev. Financ. Stud. 9 (1996) 385). However, we compare CDFs instead of densities. In the multidimensional and/or multifactor case, our proposed test is based on comparison of the empirical CDF of actual data and the empirical CDF of simulated data. Asymptotically valid critical values are obtained using an empirical process version of the block bootstrap which accounts for parameter estimation error. An example based on a simple version of the Cox et al. (Econometrica 53 (1985) 385) model is outlined and related Monte Carlo experiments are carried out.

Original languageEnglish (US)
Pages (from-to)117-148
Number of pages32
JournalJournal of Econometrics
Volume124
Issue number1
DOIs
StatePublished - Jan 2005

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Block bootstrap
  • Diffusion process
  • Multifactor model
  • Parameter estimation error
  • Specification test
  • Stochastic volatility

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