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.
- Diffusion coefficient function
- Diversified world stock index
- Kernel density
- Nonparametric estimation
- Square root process
Ignatieva, K., & Platen, E. (2012). Estimating the diffusion coefficient function for a diversified world stock index. Computational Statistics and Data Analysis, 56(6), 1333-1349. https://doi.org/10.1016/j.csda.2011.10.004