Bhardwaj, G. (Geetesh), Corradi, Valentina and Swanson, Norman R. (Norman Rasmus), 1964-. (2008) A simulation-based specification test for diffusion processes. Journal of Business and Economic Statistics, Vol.26 (No.2). pp. 176-193. ISSN 0735-0015

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Abstract

This article makes two contributions. First, we outline a simple simulation-based framework for constructing conditional distributions for multifactor and multidimensional diffusion processes, for the case where the functional form of the conditional density is unknown. The distributions can be used, for example, to form predictive confidence intervals for time period t + tau, given information up to period t. Second, we use the simulation-based approach to construct a test for the correct specification of a diffusion process. The suggested test is in the spirit of the conditional Kolmogorov test of Andrews. However, in the present context the null conditional distribution is unknown and is replaced by its simulated counterpart. The limiting distribution of the test statistic is not nuisance parameter-free. In light of this, asymptotically valid critical values are obtained via appropriate use of the block bootstrap. The suggested test has power against a larger class of alternatives than tests that are constructed using marginal distributions/densities. The findings of a small Monte Carlo experiment underscore the good finite sample properties of the proposed test, and an empirical illustration underscores the ease with which the proposed simulation and testing methodology can be applied.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Bootstrap (Statistics), Finance -- Mathematical models, Finance -- Econometric models, Parameter estimation, Stochastic processes
Journal or Publication Title:	Journal of Business and Economic Statistics
Publisher:	Americal Statistical Association
ISSN:	0735-0015
Date:	April 2008
Volume:	Vol.26
Number:	No.2
Number of Pages:	18
Page Range:	pp. 176-193
Identification Number:	10.1198/073500107000000412
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/30418

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