Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123758
Authors: 
Li, Fuchun
Year of Publication: 
2015
Series/Report no.: 
Bank of Canada Working Paper 2015-17
Abstract: 
The author proposes a test for the parametric specification of each component in the diffusion matrix of a d-dimensional diffusion process. Overall, d (d-1)/2 test statistics are constructed for the off-diagonal components, while d test statistics are constructed for the main diagonal components. Using theories of degenerate U-statistics, each of these test statistics is shown to follow an asymptotic standard normal distribution under null hypothesis, while diverging to infinity if the component is misspecified over a significant range. Our tests strongly reject the specification of diffusion functions in a variety of popular univariate interest rate models for daily 7-day eurodollar spot rates, and the specification of the diffusion matrix in some popular multivariate affine term-structure models for monthly U.S. Treasury yields.
Subjects: 
Asset pricing
Interest rates
Econometric and statistical methods
JEL: 
C12
C14
E17
E43
G12
G20
Document Type: 
Working Paper

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