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5 years ago

New test detects errors in financial models, preventing market crashes.

SSRN Electronic Journal
Semi-Nonparametric Estimation and Misspecification Testing of Diffusion Models
Dennis Kristensen

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The article introduces new tests to check if diffusion models are accurately specified. By using certain estimators, the researchers can test if the drift or diffusion term in a model is estimated correctly. They compare different estimators under different scenarios to see if the model fits the data well. The researchers also suggest using Markov Bootstrap methods to improve the accuracy of the tests. Overall, the study aims to improve the way we test and estimate diffusion models in economics.