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Using discrete-time techniques to test continuous-time models for nonlinearity in drift

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  • Becker, R.
  • Hurn, A.S.

Abstract

This paper examines whether or not a discrete-time econometric test for nonlinearity in mean may be used in cases where the data are believed to be generated in continuous time. It is demonstrated that appropriate bootstrapping techniques are required to yield a test statistic with sensible statistical properties. The technique is demonstrated by using it to examine 7-day Eurodollar rates for nonlinearity in mean.

Suggested Citation

  • Becker, R. & Hurn, A.S., 2004. "Using discrete-time techniques to test continuous-time models for nonlinearity in drift," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 64(1), pages 121-131.
    • Handle: RePEc:eee:matcom:v:64:y:2004:i:1:p:121-131
    DOI: 10.1016/j.matcom.2003.07.001
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    References listed on IDEAS

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    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
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    6. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
    7. Stanton, Richard, 1997. "A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1973-2002, December.
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    10. A. S. Hurn & K. A. Lindsay, 2002. "On the Specification of the Drift and Diffusion Functions for Continuous‐time Models of the Spot Interest Rate," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(5), pages 547-564, December.
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