Parameter Estimation and Model Testing for Markov Processes via Conditional Characteristic Functions

Chen, Songxi and Peng, Liang and Yu, Cindy (2013): Parameter Estimation and Model Testing for Markov Processes via Conditional Characteristic Functions. Published in:

Abstract

Markov processes are used in a wide range of disciplines, including finance. The transition densities of these processes are often unknown. However, the conditional characteristic functions are more likely to be available, especially for Lévy-driven processes. We propose an empirical likelihood approach, for both parameter estimation and model specification testing, based on the conditional characteristic function for processes with either continuous or discontinuous sample paths.Theoretical properties of the empirical likelihood estimator for parameters and a smoothed empirical likelihood ratio test for a parametric specification of the process are provided. Simulations and empirical case studies are carried out to confirm the effectiveness of the proposed estimator and test.

• Item Type: MPRA Paper
• Language: English
• Keywords: Conditional characteristic function; Diffusion processes; Empirical likelihood;Kernel smoothing; L´evy driven processes
• Subjects: C - Mathematical and Quantitative Methods > C0 - General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory; C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs; C - Mathematical and Quantitative Methods > C9 - Design of Experiments; G - Financial Economics > G0 - General

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