Estimating the Diffusion Coefficient Function for a Diversified World Stock Index

Computational Statistic and Data Analysis, Forthcoming

25 Pages Posted: 6 Oct 2012 Last revised: 22 Apr 2014

See all articles by Katja Ignatieva

Katja Ignatieva

University of New South Wales (UNSW); University of New South Wales - Australian School of Business

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group; University of Technology Sydney, School of Mathematical and Physical Sciences; Financial Research Network (FIRN)

Date Written: September 18, 2011

Abstract

This paper deals with the estimation of continuous-time diffusion processes which model the dynamics of a well diversified world stock index (WSI). We use nonparametric kernel-based estimation to empirically identify a square root type diffusion coefficient function in the dynamics of the discounted WSI. A square root process turns out to be an excellent building block for a parsimonious model for the WSI. Its dynamics allow capturing various empirical stylized facts and long term properties of the index, as well as, the explicit computation of various financial quantities.

Keywords: Diffusion coefficient function, diversified world stock index, square root process, nonparametric estimation, kernel density

JEL Classification: C1

Suggested Citation

Ignatieva, Katja and Ignatieva, Katja and Platen, Eckhard, Estimating the Diffusion Coefficient Function for a Diversified World Stock Index (September 18, 2011). Computational Statistic and Data Analysis, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2157779 or http://dx.doi.org/10.2139/ssrn.2157779

Katja Ignatieva (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/KatjaIgnatieva.aspx

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group ( email )

Broadway
GPO Box 123
Sydney, NSW 2007, 2007
Australia
+61 2 9514 7759 (Phone)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=90

University of Technology Sydney, School of Mathematical and Physical Sciences ( email )

P.O. Box 123
Broadway
Sydney, New South Wales 2007
Australia
+61 (02) 9514 2271 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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