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Estimation of Hyperbolic Diffusion using MCMC Method

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  • Tse, Y.K.
  • Zhang, Bill
  • Yu, Jun

Abstract

In this paper we propose a Bayesian method for estimating hyperbolic diffusion models. The approach is based on the Markov Chain Monte Carlo (MCMC) method after discretization via the Milstein scheme. Our simulation study shows that the hyperbolic diffusion exhibits many of the stylized facts about asset returns documented in the financial econometrics literature, such as a slowly declining autocorrelation function of absolute returns. We demonstrate that the MCMC method provides a useful tool to analyze hyperbolic diffusions. In particular, quantities of posterior distributions obtained from MCMC outputs can be used for statistical inferences.

Suggested Citation

  • Tse, Y.K. & Zhang, Bill & Yu, Jun, 2002. "Estimation of Hyperbolic Diffusion using MCMC Method," Working Papers 182, Department of Economics, The University of Auckland.
    • Handle: RePEc:auc:wpaper:182
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    File URL: http://hdl.handle.net/2292/182
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    Cited by:

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    2. Zhang, Xibin & King, Maxwell L., 2008. "Box-Cox stochastic volatility models with heavy-tails and correlated errors," Journal of Empirical Finance, Elsevier, vol. 15(3), pages 549-566, June.
    3. Zhang, Xibin & King, Maxwell L. & Shang, Han Lin, 2014. "A sampling algorithm for bandwidth estimation in a nonparametric regression model with a flexible error density," Computational Statistics & Data Analysis, Elsevier, vol. 78(C), pages 218-234.
    4. Rob L. Hyndman & Xibin Zhang & Maxwell L. King,, 2004. "Bandwidth Selection for Multivariate Kernel Density Estimation Using MCMC," Econometric Society 2004 Australasian Meetings 120, Econometric Society.
    5. Xibin Zhang & Maxwell L. King & Han Lin Shang, 2011. "Bayesian estimation of bandwidths for a nonparametric regression model with a flexible error density," Monash Econometrics and Business Statistics Working Papers 10/11, Monash University, Department of Econometrics and Business Statistics.
    6. Zhang, Xibin & Brooks, Robert D. & King, Maxwell L., 2009. "A Bayesian approach to bandwidth selection for multivariate kernel regression with an application to state-price density estimation," Journal of Econometrics, Elsevier, vol. 153(1), pages 21-32, November.
    7. Peter C.B.Phillips & Jun Yu, "undated". "Maximum Likelihood and Gaussian Estimation of Continuous Time Models in Finance," Working Papers CoFie-08-2009, Singapore Management University, Sim Kee Boon Institute for Financial Economics.
    8. Malmsten, Hans & Teräsvirta, Timo, 2004. "Stylized Facts of Financial Time Series and Three Popular Models of Volatility," SSE/EFI Working Paper Series in Economics and Finance 563, Stockholm School of Economics, revised 03 Sep 2004.
    9. Song Li & Mervyn J. Silvapulle & Param Silvapulle & Xibin Zhang, 2015. "Bayesian Approaches to Nonparametric Estimation of Densities on the Unit Interval," Econometric Reviews, Taylor & Francis Journals, vol. 34(3), pages 394-412, March.
    10. Han Shang, 2014. "Bayesian bandwidth estimation for a semi-functional partial linear regression model with unknown error density," Computational Statistics, Springer, vol. 29(3), pages 829-848, June.
    11. Denitsa Stefanova, 2012. "Stock Market Asymmetries: A Copula Diffusion," Tinbergen Institute Discussion Papers 12-125/IV/DSF45, Tinbergen Institute.

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    More about this item

    Keywords

    Markov ChainMonte Carlo; Economics;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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