Estimating the diffusion coefficient function for a diversified world stock index

Katja Ignatieva, Eckhard Platen

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

This paper deals with the estimation of continuous-time diffusion processes which model the dynamics of a well diversified world stock index (WSI). We use the nonparametric kernel-based estimation to empirically identify a square root type diffusion coefficient function in the dynamics of the discounted WSI. A square root process turns out to be an excellent building block for a parsimonious model for the WSI. Its dynamics allow capturing various empirical stylized facts and long term properties of the index, as well as, the explicit computation of various financial quantities.
Original languageEnglish
Pages (from-to)1333-1349
Number of pages17
JournalComputational Statistics and Data Analysis
Volume56
Issue number6
DOIs
Publication statusPublished - 2012

Keywords

  • Diffusion coefficient function
  • Diversified world stock index
  • Kernel density
  • Nonparametric estimation
  • Square root process

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