University of Western Ontario
Estimation of Continuous Time Processes Via the Empirical Characteristic Function
Email address: jknight@julian.uwo.ca
Keywords: Affine Diffusion, Affine Jump-Diffusion, Empirical Characteristic Function (ECF), Generalized Method of Moments (GMM), Stochastic Volatility (SV)
Abstract:
This paper examines a particular class of continuous-time stochastic processes commonly known as afne diffusions (AD) and afne jump-diffusions (AJD). By deriving the joint characteristic function, we are able to examine the statistical properties as well as develop an efcient estimation technique based on empirical characteristic functions (ECF) and a GMM estimation procedure based on exact moment conditions. The estimators developed in this paper require neither discretization nor simulation. We demonstrate that our methods are in particular useful for the AD and AJD models with latent variables. We illustrate our approach with a detailed examination of the continuous-time square-root stochastic volatility (SV) model, along with an empirical application using S&P 500 index returns.
PDF file of paper: knight.pdf
Session: Econometric Methods in Finance
Time: Saturday, 7 July, 8am - 9:30am
Room: A