Conditional estimation of diffusion processes

Minqiang Li, Neil D Pearson, Allen M. Poteshman

Research output: Contribution to journalArticle

Abstract

There are a number of circumstances in finance in which it is useful to estimate diffusion processes conditional on some event. In this paper, we develop the theoretical and numerical tools necessary to perform conditional estimation of diffusion processes within a generalized method of moments framework. We illustrate our method by estimating a univariate diffusion process for a standard time-series of interest rate data conditioned to remain between lower and upper boundaries. A test statistic fails to reject by a wide margin the linearity of the conditionally estimated drift coefficient.

Original languageEnglish (US)
Pages (from-to)31-66
Number of pages36
JournalJournal of Financial Economics
Volume74
Issue number1
DOIs
StatePublished - Oct 1 2004

Keywords

  • Diffusion process
  • Estimation
  • Interest rates
  • Nonlinearity

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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