TY - JOUR
AU - Ait-Sahalia,Yacine
TI - Telling from Discrete Data Whether the Underlying Continuous-Time Model is a Diffusion
JF - National Bureau of Economic Research Working Paper Series
VL - No. 8504
PY - 2001
Y2 - October 2001
DO - 10.3386/w8504
UR - http://www.nber.org/papers/w8504
L1 - http://www.nber.org/papers/w8504.pdf
N1 - Author contact info:
Yacine Aït-Sahalia
Department of Economics
Bendheim Center for Finance
Princeton University
Princeton, NJ 08540
Tel: 609/258-4015
Fax: 609/258-0719
E-Mail: yacine@princeton.edu
AB - Asset returns have traditionally been modeled in the literature as following continuous-time Markov processes, and in many cases diffusions. Can discretely sampled financial rate data help us decide which continuous-time models are sensible? Diffusion processes are characterized by the continuity of their sample paths. This cannot be verified from the discrete sample path: by nature, even if the underlying sample path were continuous, the discretely sampled data will always appear as a sequence of discrete jumps. Instead, this paper relies on a characterization of the transition density of the discrete data to determine whether the discontinuities observed in the discrete data are the result of the discreteness of sampling, or rather evidence of genuine jump dynamics for the underlying continuous-time process. I then focus on the implications of this approach for option pricing models.
ER -