## Specification Analysis of Continuous Time Models in Finance (1996)

Citations: | 3 - 1 self |

### BibTeX

@MISC{Gallant96specificationanalysis,

author = {A. Ronald Gallant and George Tauchen},

title = {Specification Analysis of Continuous Time Models in Finance},

year = {1996}

}

### OpenURL

### Abstract

The paper describes the use of the Gallant-Tauchen efficient method of moments (EMM) technique for diagnostic checking of stochastic differential equations (SDEs) estimated from financial market data. The EMM technique is a simulation-based method that uses the score function of an auxiliary model, called the score generator, to define a generalized method of moments (GMM) objective function. The technique can handle multivariate SDEs where the state vector is not completely observed. The optimized GMM objective function is distributed as chi-square and may be used to test model adequacy. Elements of the score function that have large values reflect features of data that a rejected SDE specification does not describe well and may be used for diagnostic checking. The diagnostics are illustrated by estimating a Yield-Factor Model from weekly, 1962--1995, term structure data comprised of short (3 month), medium (12 month), and long (10 year) Treasury rates. The Yield-Factor Model is sharp...

### Citations

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Citation Context ...tions. How best to select the tuning parameters L u ; L r ; L p ; K z ; I z ; K z ; and I z is an open question. At present we recommend moving along an upward expansion path using the BIC criterion (=-=Schwarz, 1978-=-) BIC = s n ( ~ `) + (1=2)(p K =n) ln(n); s n (`) = \Gamma 1 n n X t=0 log[f K (~y t j~y t\GammaL ; : : : ; ~ y t\Gamma1 ; `)]; to guide the search, models with small values of BIC being preferred. An... |

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Citation Context ... : ; ~ y t\Gamma1 ; `)]; and if K grows with sample size n [either adaptively as a random variable ~ K n or deterministically as a function K(n)]; then ~ p n (yjx) = fK (yjx; ~ ` n ) is a consistent (=-=Gallant and Nychka, 1987-=-) and efficient (Fenton and Gallant, 1996a; Gallant and Long, 1995) nonparametric estimator of p(yjx) with desirable qualitative features (Fenton and Gallant, 1996b). A standard method of describing a... |

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Citation Context ...d and do not provide statistics for specification analysis. As noted above, appropriate choice of the score generator in EMM estimation guarantees efficiency and protects against specification error (=-=Gallant and Long, 1995-=-; Tauchen, 1995). Specifically, the score generator must provide a complete statistical description of the ob1 served series. Here we use the seminonparametric (SNP) density proposed by Gallant and Ta... |

53 | On fitting a recalcitrant series: The pound/dollar exchange rate, 1974–83 - Gallant, Hsieh, et al. - 1991 |

39 |
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Citation Context ...tistics for specification analysis. As noted above, appropriate choice of the score generator in EMM estimation guarantees efficiency and protects against specification error (Gallant and Long, 1995; =-=Tauchen, 1995-=-). Specifically, the score generator must provide a complete statistical description of the ob1 served series. Here we use the seminonparametric (SNP) density proposed by Gallant and Tauchen (1989). T... |

25 | Econometric modeling of term structures of defaultable bonds. Working paper, Graduate - Duffie, Singleton - 1994 |

19 | EMM: A program for efficient method of moments estimation, version 1.4, user’s guide, working paper, University of North Carolina at Chapel Hill. Available along with code and worked example by anonymous ftp at site ftp.econ.duke.edu in directory pub/get/
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Citation Context ...g parameter selection strategy just described has given reasonable results in much applied work. See Fenton and Gallant (1996b) and the references therein. Fortran code, a User's Guide in PostScript (=-=Gallant and Tauchen, 1995-=-a), and PC executables for quasi-maximum likelihood estimation of the parameters of the SNP density are available by anonymous ftp at site ftp.econ.duke.edu in directory pub/arg/snp. The Fortran code ... |

19 |
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(Show Context)
Citation Context ...term structure. EMM applied to a score from an SNP density constrained so that K x = 0 is consistent and asymptotically normal, so long as the underlying continuous time model is correctly specified (=-=Gallant and Tauchen, 1996-=-), albeit with a possible efficiency loss (Gallant and Long, 1995). Failure to fit this score can, of course, be construed as sharp evidence against the specification of the continuous time model. How... |

19 | The dynamics of short-term interest rate volatility reconsidered - Koedijk, Nissen, et al. - 1997 |

12 |
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Citation Context ... (`) = \Gamma 1 n n X t=0 log[f K (~y t j~y t\GammaL ; : : : ; ~ y t\Gamma1 ; `)]; to guide the search, models with small values of BIC being preferred. An alternative to BIC is the Hannan and Quinn (=-=Hannan, 1987-=-) criterion HQ = s n ( `) + (p ` =n) ln[ln(n)]: The expansion path has a tree structure. Rather than examining the full tree, our strategy is to expand first in L u with L r = L p = K z = K z = 0 unti... |

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1 | Tauchen (1995c), "Estimation of Continuous Time Models for Stock Returns and Interest Rates," Working paper - Gallant, George |