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Nonparametric Estimation of the Diffusion Coefficient via Fourier Analysis, with Aplication to Short Rate Modeling

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  • Roberto Reno'

Abstract

In this paper a new fully nonparametric estimator of the diffusion coefficient is introduced, based on Fourier analysis of the observed trajectory. The proposed estimator is proved to be consistent and asymptotically normally distributed. After testing the estimator on Monte Carlo simulations, we use it to estimate an univariate model of the short rate with available interest rate data. Data analysis helps shedding new light on the functional form of the diffusion coefficient.

Suggested Citation

  • Roberto Reno', 2004. "Nonparametric Estimation of the Diffusion Coefficient via Fourier Analysis, with Aplication to Short Rate Modeling," Department of Economics University of Siena 440, Department of Economics, University of Siena.
    • Handle: RePEc:usi:wpaper:440
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    1. Jiang, George J. & Knight, John L., 1997. "A Nonparametric Approach to the Estimation of Diffusion Processes, With an Application to a Short-Term Interest Rate Model," Econometric Theory, Cambridge University Press, vol. 13(5), pages 615-645, October.
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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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