Parameter Estimation and Bias Correction for Diffusion Processes

Host Institution:

La Trobe University

Title of Seminar:

Parameter Estimation and Bias Correction for Diffusion Processes

Speaker's Name:

Prof. Song Xi Chen,

Speaker's Institution:

La Trobe University

Time and Date:

Friday 2pm Friday 7 March 2008

Seminar Abstract:

This lecture considers parameter estimation for continuous-time diffusion processes which are commonly used to model dynamics of financial securities including interest rates. To understand why the drift parameters are more difficult to estimate than the diffusion parameter as observed in many empirical studies, we develop expansions for the bias and variance of parameter estimators for two mostly employed interest rate processes.
A parametric bootstrap procedure is proposed to correct  bias in parameter estimation of
general diffusion processes with a theoretical justification. Simulation studies confirm the theoretical findings and show that the bootstrap proposal can effectively reduce both the bias and the mean square error of parameter estimates for both univariate and multivariate processes.
The advantages of using more accurate parameter estimators when calculating various option prices in finance are demonstrated by an empirical study on a Fed fund rate data.

A lunch, prior to the seminar, will be held with the seminar speaker at the John Scott Restaurant at 12.30. If you wish to attend this lunch then please inform Paul Pontikis.