Maximum penalized quasi-likelihood estimation of the diffusion function

Details Maximum penalized quasi-likelihood estimation of the diffusion function Maximum penalized quasi-likelihood estimation of the diffusion function

2010-08-14

arxiv.org/abs/1008.2421v2

Economy

Quantitative Finance

Statistical Finance

17 pages, 4 figures, revised version

Scientific paper

We develop a maximum penalized quasi-likelihood estimator for estimating in a nonparametric way the diffusion function of a diffusion process, as an alternative to more traditional kernel-based estimators. After developing a numerical scheme for computing the maximizer of the penalized maximum quasi-likelihood function, we study the asymptotic properties of our estimator by way of simulation. Under the assumption that overnight London Interbank Offered Rates (LIBOR); the USD/EUR, USD/GBP, JPY/USD, and EUR/USD nominal exchange rates; and 1-month, 3-month, and 30-year Treasury bond yields are generated by diffusion processes, we use our numerical scheme to estimate the diffusion function.

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