Department of Economics and Business Economics

Diffusion Copulas: Identification and Estimation

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  • rp18_20

    Final published version, 759 KB, PDF-document

    Ruijun Bu, Department of Economics, Management School, University of Liverpool, United KingdomKaddour Hadri, Queen’s University Management School, Queen’s University Belfast, United KingdomDennis Kristensen, University College London, CeMMaP, and Institute for Fiscal Studies, United Kingdom
We propose a new semiparametric approach for modelling nonlinear univariate diffusions, where the observed processes are nonparametric transformations of underlying parametric diffusions (UPDs). This modelling strategy yields a general class of semiparametric Markov diffusion models with parametric dynamic copulas and nonparametric marginal distributions. We provide primitive conditions for the identification of the UPD parameters together with the unknown transformations from discrete samples. Semiparametric likelihood-based estimators of the UPD parameters are developed and we show that under regularity conditions both the parametric and nonparametric components converge with parametric rate towards Normal distributions. Kernel-based drift and diffusion estimators are also proposed and shown to be normally distributed in large samples. A simulation study investigates the …finite sample performance of our estimators in the context of modelling US short-term interest rates.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages39
Publication statusPublished - 20 Aug 2018
SeriesCREATES Research Papers
Number2018-20

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