Reprojecting partially observed systems with application to interest rate diffusions

Andrew Ronald Gallant, George Tauchen

Research output: Contribution to journalArticle

106 Citations (Scopus)

Abstract

We introduce reprojection as a general purpose technique for characterizing the dynamic response of a partially observed nonlinear system to its observable history. Reprojection is the third step of a procedure wherein first data are summarized by projection onto a Hermite series representation of the unconstrained transition density for observables; second, system parameters are estimated by minimum chi-squared, where the chi-squared criterion is a quadratic form in the expected score of the projection; and third, the constraints on dynamics implied by the nonlinear system are imposed by projecting a long simulation of the estimated system onto a Hermite series representation of the constrained transition density for observables. The constrained transition density can be used to study the response of the system to its observable history. We utilize the technique to assess the dynamics of several diffusion models for the short-term interest rate that have been proposed and to compare them to a new model that has feedback from the interest rate into both the drift and diffusion coefficients of a volatility equation.

Original languageEnglish (US)
Pages (from-to)10-24
Number of pages15
JournalJournal of the American Statistical Association
Volume93
Issue number441
DOIs
StatePublished - Mar 1 1998

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Transition Density
Interest Rates
Chi-squared
Series Representation
Hermite
Nonlinear Systems
Projection
Diffusion Model
Dynamic Response
Quadratic form
Volatility
Diffusion Coefficient
Interest rates
Simulation
History
Nonlinear systems
Model

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Statistics, Probability and Uncertainty

Cite this

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Reprojecting partially observed systems with application to interest rate diffusions. / Gallant, Andrew Ronald; Tauchen, George.

In: Journal of the American Statistical Association, Vol. 93, No. 441, 01.03.1998, p. 10-24.

Research output: Contribution to journalArticle

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