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| Publications [#238939] of George E. Tauchen
Chapters in Books
- Gallant, AR; Tauchen, G, Specification Analysis of Continuous Time Models in Finance,
in Modeling Stock Market Volatility: Bridging the Gap to Continuous Time, edited by Peter E. Rossi
(October, 1995),
pp. 357-383, Academic Press [repository]
(last updated on 2024/01/01)
Abstract:
The paper describes the use of the Gallant-Tauchen efficient
method of moments (EMM)
technique for diagnostic checking of stochastic differential equations
(SDEs) estimated from
financial market data. The EMM technique is a simulation-based method
that
uses the score
function of an auxiliary model as the criterion to define a generalized
method of moments (GMM)
objective function. The technique can handle multivariate SDEs where the
state vector is not
completely observed. The optimized GMM objective function is distributed
as chi-square and
may be used to test model adequacy. Elements of the score function
correspond to specific
parameters and large values reflect features of data that a rejected SDE
specification does not
describe well. The diagnostics are illustrated by estimating a
three-factor model to weekly,
1962-1995, term structure data comprised of short (3 month), medium (12
month), and long (10
year) Treasury rates. The Yield-Factor Model is sharply rejected,
although
an extension that
permits the local variance function to be a convex function of the
interest rates comes much closer
to describing the data.
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